37630 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

1See Cades versus H & R Block, Inc., 43 F.3d 869,

874 (4th Cir. 1994) and OCC letter of October 5,

1993 from William P. Bowden, Jr., Chief Counsel at

page 4, which state that institutions that are not

affiliated with a bank, but provide services to

customers of the bank, do not constitute branches

so long as the bank does not ‘‘establish or operate’’

the institution providing the services.

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 250

[Regulation H; Docket No. R–0964]

Membership of State Banking

Institutions in the Federal Reserve

System; Miscellaneous Interpretations

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board of Governors of the

Federal Reserve System is amending

Subpart A of Regulation H, regarding

the general provisions for membership

in the Federal Reserve System, and

Subpart E of Regulation H, regarding

Interpretations, in order to reduce

regulatory burden, simplify and update

requirements, and eliminate several

obsolete interpretations. As part of the

final rule the Board is reissuing prior

Subparts B and C. Prior Subparts B and

C have not been significantly amended

but have been relettered (as Subparts D

and E, respectively) to reflect the fact

that prior Subpart A was broken into

four new Subparts (Subparts A, B, C and

F). Prior Subpart D, regarding safety and

soundness standards, has been

incorporated into new Subpart A. The

final rule does not amend in any way

Appendices A through E to Part 208.

This final rule to modernize Subpart A

of Regulation H is in accordance with

the Board’s policy of reviewing its

regulations as well as the Board’s review

of regulations under section 303 of the

Riegle Community Development and

Regulatory Improvement Act of 1994.

EFFECTIVE DATE: October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Rick

Heyke, Staff Attorney, Legal Division

(202/452–3688), or Jean Anderson, Staff

Attorney, Legal Division (202/452-

3707). For the hearing impaired only,

Telecommunications Device for the Deaf

(TDD), Diane Jenkins (202/452–3544).

SUPPLEMENTARY INFORMATION:

Background

The Board is adopting amendments to

its Regulation H (12 CFR part 208),

regarding the general provisions for

state bank membership in the Federal

Reserve System, as part of its policy of

reviewing its regulations, and consistent

with section 303 of the Riegle

Community Development and

Regulatory Improvement Act of 1994

(Riegle Act), Pub. L. 103–328. Section

303 of the Riegle Act requires each

Federal banking agency to review and

streamline its regulations and written

policies to improve efficiency, reduce

unnecessary costs, and remove

inconsistencies and outmoded and

duplicative requirements. The

amendments are designed to reduce

regulatory burden and simplify and

update the regulation.

The principal amendments are

described below. In general, the

amendments serve to reorganize, clarify,

and reduce the burden of compliance

with Subpart A of Regulation H. The

amendments modify the procedures for

membership and branch applications,

incorporate a new section designed to

provide guidance to banks regarding

permissible investments in securities,

expand the circumstances under which

the Board will consider waivers of

conditions of membership, eliminate

existing requirements regarding

disclosure of financial condition,

eliminate the requirement that banks

obtain deposit insurance in order to

become State member banks, and

generally provide a definition of branch

that is consistent with OCC regulations

and decisions. The amendments also

serve to eliminate a number of

interpretations elsewhere; specifically,

interpretations: 12 CFR 250.120,

250.121, 250.122, 250.123, 250.140,

250.161, 250.162, 250.300, 250.301 and

250.302. The amended Regulation H

replaces the existing Regulation H in its

entirety, except for the Appendices to

Regulation H, which remain unchanged.

A red-lined version of the

amendments to the regulation and

commentary is available from the

Board’s Freedom of Information Office

or by calling 202–452–3684.

The Board published Regulation H for

comment in the Federal Register on

March 31, 1997 (62 FR 15272). The

Board received 14 comments to the

proposed amendments from the

following types of institutions:

Banks/thrifts—1

Community groups—1

Trade associations—4

Federal Reserve Banks—7

Clearinghouses—1

Twelve of the 14 comments generally

supported the proposed amendments as

serving to reduce regulatory burden on

banks and as clarifying membership

requirements. In addition, the

comments addressed specific issues

raised by the proposed amendments.

These comments and issues are

discussed below in the section-bysection analysis. Any sections of the

regulation which are not discussed in

the section-by-section analysis were

adopted as originally proposed by the

Board.

Section-by-Section Analysis

Subpart A—General Membership and

Branching Requirements

Section 208.2 Definitions

Definition of Branch. The Board

proposed to define a branch as any

branch bank, branch office, branch

agency, additional office, or any branch

place of business that receives deposits,

pays checks, or lends money. The

proposed rule also stated that a branch

may include a temporary, seasonal, or

mobile facility. In addition to defining

what constitutes a branch, the proposed

rule specified certain arrangements that

do not constitute a branch. The Board

proposed that a branch not include a

loan origination facility where the

proceeds of loans are not disbursed,

automated teller machines, remote

service units, offices of an affiliated

depository institution that provide

services to customers of a State member

bank on behalf of the State member

bank, or a facility that would otherwise

qualify as a branch because it engages in

one or more branching functions

(receipt of deposits, payment of

withdrawals, or making loans) but

which prohibits access to members of

the public for purposes of conducting

one or more branching functions.

In this regard the proposed rule

requested comment on whether a

branch should include offices of an

unaffiliated depository institution that

provide services to customers of a State

member bank on behalf of the State

member bank. Six commenters, the

Federal Reserve Banks of Minneapolis,

Atlanta, Philadelphia and San

Francisco, the America’s Community

Bankers, and the American Bankers

Association, supported excluding

unaffiliated depository institutions that

provide services to a State member bank

from the definition of a branch. In light

of these comments, and in light of

current case law and consistent with

Office of the Comptroller of the

Currency (OCC) decisions,1 the Board is

excluding from the definition of branch

arrangements where either affiliated or

unaffiliated institutions provide services

to customers of a State member bank.

The final rule provides that a branch

does not include an office of an

affiliated or unaffiliated institution that

provides services to customers of the

member bank on behalf of the member
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37631

2See, e.g., Cades, 43 F.3d at 874. Although the

bank would be permitted, in contracting with the

institution, to control the terms of the services

provided by the institution. For example, the bank’s

contractual relationship with the institution could

include such issues as which institution would bear

the risk of loss for items in transit or when accounts

would be credited with deposits or charged with

withdrawals.

bank so long as the bank does not

‘‘establish or operate’’ the office

providing the services. For example, a

bank could contract with an unaffiliated

or affiliated institution to receive

deposits, cash and issue checks, drafts,

and money orders, change money and

receive payments of existing

indebtedness without becoming a

branch of that bank so long as that bank:

(a) has no ownership or leasehold

interest in the institution’s offices; (b)

has no employees who work for the

institution; and (c) exercises no

authority or control over the

institution’s employees or methods of

operation.2

With respect to the statement in the

proposed rule that a branch does not

include a ‘‘remote service unit,’’ one

commenter requested that the Board

define the term ‘‘remote service unit.’’

The Board is adopting the term ‘‘remote

service unit’’ as proposed and without

further definition. The Board believes

that ‘‘remote service units’’ may take a

variety of forms, and that defining the

term at this time would be premature.

The Board notes that the OCC has

determined that a ‘‘remote service unit’’

includes an automated loan machine

and believes that ‘‘remote service units’’

may include automated loan machines

as well as other arrangements.

Definition of Capital Stock and

Surplus. The Board proposed to define

capital stock and surplus in Regulation

H to mean Tier 1 and Tier 2 capital, as

calculated under the risk-based capital

guidelines, plus any allowance for loan

and lease losses not already included in

Tier 2 capital. The Board proposed

applying this definition to all references

to capital stock and surplus in the

Federal Reserve Act and Regulation H,

unless otherwise noted. The Board

received one comment that Regulation

H should incorporate the term ‘‘capital’’

rather than capital stock and surplus

because it would help to reduce the

historical reference to the more narrow

meaning of capital stock and surplus,

which related only to part of

shareholders’ equity accounts. Use of

the term capital stock and surplus is

appropriate and consistent with the

terms of the Federal Reserve Act. Use of

the term capital stock and surplus

should make it easier for banks to

comply with the Board’s regulations

since the term capital stock and surplus,

as defined in the proposal, has been

adopted for purposes of section 23A of

the Federal Reserve Act (12 U.S.C. 371c)

which governs transactions between

insured depository institutions) and

Regulation O (12 CFR 215) (which

governs insider lending). All other

commenters supported the proposed

definition of capital stock and surplus,

as well as the use of the term itself, and

the Board is adopting the definition and

term as proposed.

Definition of Eligible Bank. The Board

proposed a new definition, eligible

bank, to serve as the qualification for

expedited treatment of membership and

branch applications. The Board

proposed that eligible bank be defined

as a bank that: (a) is well capitalized; (b)

has a Uniform Financial Institutions

Rating System (CAMELS) rating of 1 or

2 (copies are available at the address

specified in § 216.6 of this chapter); (c)

has a Community Reinvestment Act

(CRA) rating of ‘‘Outstanding’’ or

‘‘Satisfactory;’’ (d) has a compliance

rating of 1 or 2; and (e) has no major

unresolved supervisory issues

outstanding as determined by the Board

or the appropriate Federal Reserve

Bank.

The Board received one comment that

the definition should require a CRA

rating of ‘‘Outstanding’’ rather than a

rating of ‘‘Outstanding’’ or

‘‘Satisfactory.’’ The commenter opposed

allowing banks with ‘‘Satisfactory’’

ratings to receive eligible bank status

because the commenter stated most

banks receive ‘‘Satisfactory’’ ratings and

because CRA ratings are not a reliable

indicator of the bank’s CRA

performance. The remainder of the

commenters supported the definition of

eligible bank with one commenter

requesting clarification as to whether

the Board intended to preclude banks

with a compliance rating of three from

qualifying as an eligible bank.

The Board is adopting the definition

of eligible bank as proposed. Allowing

membership or branch applications

from banks with ‘‘Satisfactory’’ CRA

ratings to qualify for expedited

treatment continues prior Board policies

and provides for consistency with the

OCC’s standards for determining

whether membership or branch

applications should receive expedited

treatment. The Board has modified its

previous standard for receiving

expedited treatment by requiring a

compliance rating of 1 or 2 rather than

1, 2, or 3. This change provides

consistency with the OCC’s definition of

eligible bank and is being adopted as

proposed.

If a bank has not yet received

compliance or CRA ratings from a bank

regulatory authority, which would be

necessary for determining whether it is

an eligible bank, the Board will look to

the bank’s holding company for

purposes of determining whether the

bank’s application should receive

expedited processing. If the bank’s

holding company meets the criteria for

expedited processing under § 225.14(c)

of Regulation Y (12 CFR 225.14(c)), the

bank’s membership or branch

application will be eligible for

expedited processing.

Banks that have not yet received

compliance or CRA ratings and that

either are not owned by a bank holding

company or are owned by a bank

holding company that does not meet the

criteria for expedited processing under

§ 225.14(c) of Regulation Y, are not

eligible for expedited treatment.

Definition of Mutual Savings Bank.

The Board proposed deleting the

definition of mutual savings bank as

unnecessary. One commenter opposed

deletion of the definition on the basis

that deletion ‘‘indirectly suggest[s] that

companies should abandon the

traditional mutual charter.’’ The Board

does not believe that removal of the

definition carries this implication and is

adopting the proposal. The status of

mutual savings banks continues to be

addressed in § 208.3(a) of Regulation H,

concerning applications for membership

and stock, as well as in the Board’s

Regulation I (12 CFR 209), published

elsewhere in today’s Federal Register,

for purposes of determining the amount

of Reserve Bank stock mutual savings

banks are required to purchase (or in

certain special cases the amount of

money they must deposit with a Reserve

Bank). See 12 CFR 209.4(c).

Section 208.3 Application and

Conditions for Membership

Publication of Membership

Applications. The proposal stated that

public comment on membership

applications (including conversions) is

not expressly required by statute but

that publication might allow the Board

to obtain additional information or

views relevant to a membership

application. The Board requested

comment as to whether it should require

publication for membership

applications.

The Board received comments both

supporting and opposing eliminating

the publication requirement for

membership applications. The majority

of commenters favored eliminating the

requirement. These commenters stated

that no significant information is gained

through publication that would
37632 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

3This clarification addresses only earnings

deficits that result from dividends declared in

excess of net income for the year and does not

apply to other types of current earnings deficits. It

is consistent with the OCC’s letter dated December

22, 1997, and published as Interpretive Letter #816.

4The OCC, in revising its branch application

procedures, retained a 30 day comment period for

all branch applications other than those involving

‘‘short-distance’’ relocations (which relocations, if

within the same neighborhood, would not require

a branch application under the Board’s final rule).

outweigh the burden it places on banks.

Those opposing eliminating the

requirement stated that comments may

provide useful information in the

context of de novo membership

applications or that the burden it places

on banks is minimal in light of the fact

that many banks seek FDIC insurance,

which requires a public comment

period. The Board is eliminating the

requirement that banks seeking to

become members of the Federal Reserve

System publish notice of membership

applications.

Because membership applications no

longer confer deposit insurance, the

requirement currently contained in the

Board’s Rules of Procedure (12 CFR

262.3), which states that banks must

publish notice of their membership

applications, no longer applies. The

Board’s Rules of Procedure (12 CFR

262.3) will be amended in the future to

reflect the fact that membership no

longer automatically confers deposit

insurance and to reflect the change that

banks no longer need to publish notice

of membership applications.

Processing Time Frames for Expedited

Membership Applications. The

proposed rule provided that if public

comment on membership applications

were eliminated, expedited membership

applications would be acted on 30 days

after receipt of the application. One

commenter requested that the Board act

on expedited membership applications

within 15 days because, under existing

guidelines, non-expedited membership

applications are acted on within 30 days

and expedited membership applications

should be acted on sooner than nonexpedited membership applications.

The Board is adopting a rule under

which expedited membership

applications will be acted on within 15

days of receipt of the application. Nonexpedited membership applications will

be acted on promptly, however, in

limited situations processing times may

be longer if the application involves

unusual facts or raises novel policy

issues.

Membership Exams. The proposed

rule did not include information

concerning the time frame or conditions

under which the Federal Reserve will

examine banks seeking membership in

the Federal Reserve System. One

commenter requested that guidance be

provided in Regulation H regarding the

time frames for, and necessity of, premembership examinations of banks.

Another commenter requested that the

exam guidelines in SR 95–30 be

updated. The Board has decided not to

incorporate pre-membership

examination guidelines into Regulation

H because the necessity for, and

duration of, examinations depends on

the individual circumstances of each

bank.

Conditions of Membership. The

proposed rule incorporated a new

§ 208.3(d) which combined and

condensed former §§ 208.6 and 208.7

concerning the general conditions and

requirements of membership. The

former requirement that the capital and

surplus of a State member bank be

adequate in relation to its existing and

prospective deposit liabilities was

modified and placed in proposed

§ 208.4. Proposed § 208.3(d) also

incorporated the provisions of existing

Subpart D, ‘‘Standards for Safety and

Soundness.’’

In addition, the Board proposed to

eliminate existing § 208.6(a), which

points out that State member banks

retain all charter and statutory rights

under state law not preempted by

Federal law, and § 208.6(b), which states

that State member banks are entitled to

all the privileges of membership

afforded them under the Federal

Reserve Act and other acts of Congress,

and must observe all requirements of

Federal law. One commenter stated that

eliminating existing § 208.6(a) and (b)

would create confusion because the

sections state important concepts. The

Board continues to believe, however,

that these propositions are self-evident

and do not need to be explicitly stated.

Therefore, existing § 208.6(a) and (b) are

not included in the final Regulation H.

Another commenter requested that

the term ‘‘general character of a bank’s

business’’ (§ 208.3(d)(2)) be defined. The

Board believes that providing a

definition of the term could result in an

unduly restrictive or inflexible

definition and, therefore, has not

incorporated such a definition in

Regulation H.

Section 208.5 Dividends and Other

Distributions

Proposed § 208.5 revised the existing

provisions concerning payment of

dividends and withdrawal of capital,

previously located at § 208.19. Proposed

§ 208.5 also incorporated interpretations

previously located at § 208.125 through

§ 208.127. The final rule retains § 208.5

as proposed, however, in the case of

dividends in excess of net income for

the year, the final rule clarifies that

banks generally are not required to carry

forward negative amounts resulting

from such excess.3 The final rule also

contains a cross reference to § 208.45 of

Subpart D for purposes of determining

restrictions on the payment of capital

distributions.

Section 208.6 Establishment and

Maintenance of Branches

Duration of Comment Period. The

Board’s proposal requested comment on

whether it should shorten the public

comment period applicable to branch

applications from the 30 days that is

currently required to 15 days. Those

commenters favoring shortening the

comment period stated that comments

on branch applications rarely raise

substantive issues and that shortening

the period would serve to reduce

regulatory burden on banks.

Commenters opposing shortening the

comment period stated that shortening

the comment period to 15 days would

make it difficult for commenters to

provide substantive comments to the

Board on branch applications. The

Board is reducing the public comment

period on branch applications from 30

to 15 days but will allow, in its

discretion, an extension of the comment

period for an additional 15 days.4

Sections 208.6(a)(3) and (a)(4) describe

the new procedural rules for public

comment on branch applications,

including the new 15 day comment

period and the potential 15 day

extension. The Board’s Rules of

Procedure (12 CFR 262.3) will continue

to describe the form and location for

public notices and will be amended in

the future to reflect the 15 day comment

period applicable to branch

applications.

Processing Time Frames for Expedited

Branch Applications. The proposed rule

provided procedures for processing

expedited branch applications that were

modified slightly from the Board’s

existing procedures, located in

Administrative Letter 92–82 (November

5, 1992). The proposed rule provided

that a branch application by an eligible

bank would be deemed approved by the

Board or the appropriate Reserve Bank

five business days after the close of the

public comment period, unless the

Board or the appropriate Reserve Bank

notifies the bank that the application is

approved prior to that date or that the

bank is not eligible for expedited

processing because: (a) it is not an

eligible bank; (b) the application

contains a material error or is otherwise

deficient; or (c) the application or notice
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37633

required under the Board’s Rules of

Procedure (12 CFR 262.3), raises

significant supervisory, Community

Reinvestment Act, compliance, policy

or legal issues that have not been

resolved, or a timely substantive adverse

comment is submitted. In addition, the

preamble to the proposed rule stated

that in no case would an expedited

branch application be approved prior to

the third day after the close of the

public comment period.

In the final rule, the Board is

including in the text of the regulation an

express statement that expedited branch

applications will not be approved prior

to the third day after the close of the

public comment period. Waiting until

the third day enables the Board, or

appropriate Reserve Bank, to determine

whether it has received any public

comments on the application. In all

other respects the processing time

frames for expedited branch

applications remain the same as

proposed. The Board will be amending

its Rules of Procedure to incorporate the

changes adopted in the final rule.

Non-expedited branch applications

will be processed in accordance with

the Board’s Applications Procedures

Manual.

Processing Procedures. The proposed

rule required branch applications to be

filed in accordance with the Board’s

Rules of Procedure (12 CFR 262.3). One

commenter raised a question as to

whether eligible banks must file a ‘‘full’’

branch application. Both eligible and

non-eligible banks must comply with

the Board’s Rules of Procedure. More indepth review is expected in non-eligible

bank branch applications. Accordingly,

the Board may require more extensive

information regarding non-eligible bank

branch applications than eligible bank

branch applications. In particular, the

Board pays close attention to areas that

have caused the bank to become noneligible.

Notification of Branch Opening.

Section 208.6(d) of the proposed rule

explicitly authorized a single

consolidated application for branches

that a State member bank plans to

establish in a one-year period, provided

the bank meets the existing requirement

that it notify the appropriate Reserve

Bank one week prior to opening any

branch covered by the approval. One

commenter raised a question as to

whether it was necessary for banks to

provide prior notification of opening a

branch. The Board has reviewed this

policy further and concurs with the

commenter that prior approval is

unnecessary, therefore, § 208.6(d) of the

final rule provides for a more flexible

time for notification, merely requiring

notice within 30 days after opening the

branch.

Branch Closings. The proposed rule

established a new § 208.6(e) regarding

branch closings, which requires branch

closings to comply with section 42 of

the FDI Act (12 U.S.C. 1831r–1). Section

42(e) requires notice to both customers

and, in the case of insured State member

banks, the Board, of proposed branch

closings. The proposed rule also

clarified that a branch relocation is not

a closing for purposes of section 42(e) of

the FDI Act. Under section 42(e) of the

FDI Act, a branch relocation is a

movement that occurs within the

immediate neighborhood and that does

not substantially affect the nature of the

business or customers served.

One commenter requested that

§ 208.6(e) refer to the Interagency Policy

Statement on Branch Closings. The

Board believes that referring to the

policy statement in § 208.6(e) would

reduce the flexibility inherent in policy

statements and, therefore, is not

referring to it in Regulation H.

Section 208.7 Prohibition Against Use

of Interstate Branches Primarily for

Deposit Production

The final rule includes the text of

existing § 208.28, as issued in final by

the Board on September 10, 1997 (62 FR

47727) with an effective date of October

10, 1997. Existing § 208.28 remains

unchanged except that it is being

renumbered from § 208.28 to § 208.7.

Subpart B—Investments and Loans

Section 208.21 Investments in

Premises and Securities

Investments in Premises. Section

208.21(a) of the proposed rule provided

new investment limitations on banks’

investments in premises. These new

limitations were incorporated into

Regulation H as a result of amendments

to section 24A of the Federal Reserve

Act made by the Economic Growth and

Regulatory Paperwork Reduction Act of

1996, Pub. L. 104–208, 110 Stat. 3009,

(Economic Growth Act). The Economic

Growth Act provides that banks may

make investments in bank premises if

they either: (a) obtain prior approval

from the Board; (b) invest less than or

equal to the bank’s capital stock; or (c)

invest less than or equal to 150 percent

of the bank’s capital and surplus so long

as the bank is well-rated and well

capitalized and provides the Board with

notice no later than 30 days after

making the investment. The Economic

Growth Act creates investment in

premises limits based on banks’ ‘‘capital

stock’’ or ‘‘capital and surplus.’’ The

proposed rule based the investment

limits on the basis of banks’ capital

stock and surplus, as defined by

§ 208.2(d) of Regulation H. One

commenter stated that limitations on

investments in premises for non-well

rated and non-well capitalized banks

should be based on banks’ ‘‘capital

stock’’ rather than the banks’ capital

stock and surplus as defined by

Regulation H. The commenter stated

that liberalizing the investment limit for

non-well rated and non-well capitalized

banks could result in supervisory

concerns, particularly with respect to

problem banks.

The Board believes that basing

investment in premises limits on capital

stock and surplus could present

supervisory problems, therefore, the

Board is basing the investment in

premises limits on a bank’s perpetual

preferred stock and related surplus plus

common stock plus surplus, as those

terms are defined in the FFIEC

Consolidated Reports of Condition and

Income. If a well rated and well

capitalized bank chooses to invest an

amount above 150% of its perpetual

preferred stock and related surplus plus

common stock plus surplus (or, for a

non-well-rated and well-capitalized

bank, 100% of its perpetual preferred

stock and related surplus plus common

stock plus surplus) the bank may do so

as long as it provides the appropriate

Reserve Bank at least 15 days notice

prior to making such investments and

has not received notice that the

investment is subject to further review

by the end of the fifteen day notice

period.

Another commenter raised a question

as to whether it was necessary for the

Board to receive after-the-fact notice of

investments in premises that are less

than or equal to 150% of banks’

perpetual preferred stock and related

surplus plus common stock plus surplus

as required by § 208.21(a)(3)(ii)(C). The

commenter questioned the usefulness of

after-the-fact notice of such investments.

The Board has concluded that such

after-the-fact notice is unnecessary. The

Economic Growth Act provides that

banks with a CAMELS rating of 1 or 2,

as of the most recent examination of the

bank, and that are, and continue to be,

well capitalized, may make investments

in bank premises of less than or equal

to 150 percent of the bank’s capital and

surplus so long as they provide the

Board with after-the-fact notice of such

investments. Under section 24A the

Board also has the authority to grant

banks prior approval to make

investments in premises. Pursuant to

this authority the Board is granting prior

approval for state member banks with a

CAMELS rating of 1 or 2, as of the most
37634 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

5 12 CFR 6.2(j). 6F.R.R.S. 3–447.13 (July 26, 1988).

recent examination of the bank, and that

are, and continue to be, well capitalized,

to make investments in bank premises

of less than or equal to 150 percent of

the bank’s perpetual preferred stock and

related surplus plus common stock plus

surplus without providing the Board

with after-the-fact notice of such

investments.

Investments in Securities. The

proposal incorporated a new § 208.21(b)

which provided guidance to banks

regarding permissible investments in

securities. For the reasons outlined

below under the discussion of the

Board’s interpretation on Investments in

Shares of an Investment Company, the

Board is amending § 208.21(b) to clarify

generally that, with respect to certain

investment company shares and

investment securities, a State member

bank may look to the OCC’s Part 1 rules

and interpretations to determine

whether a security qualifies as an

investment security for the purpose of

section 24, paragraph 7th, and for the

calculations of the limitations

applicable to such investments. Section

208.21(b) is also being amended to

clarify that a State member bank should

consult the Board for determinations

with respect to issues concerning

investment securities that have not been

addressed by the OCC rules and

interpretations.

Voting Stock in a Fiduciary Capacity.

The proposed rule contained a footnote,

footnote four, which several

commenters stated would prevent banks

from voting shares of stock in a

fiduciary capacity. Footnote four was

derived from, and was intended to

update, a Board interpretation located at

12 CFR 250.220, which was to be

removed. The Board is not including

footnote four in the final rule and is

retaining the Board interpretation found

at 12 CFR 250.220 which states that

banks may vote shares of stock if they

are acting in a fiduciary capacity.

Subpart C—Bank Securities and

Securities-Related Activities

Section 208.34 Recordkeeping and

Confirmation of Certain Securities

Transactions

Effected by State Member Banks. The

final rule includes the text of existing

§ 208.24, as issued in final by the Board

on March 5, 1997 (62 FR 9909), with an

effective date of April 1, 1997. Existing

§ 208.24 remains unchanged except that

it is being renumbered from § 208.24 to

§ 208.34.

Section 208.35 Qualification

Requirements for the Recommendation

or Sale of Certain Securities

The final rule includes a place holder

for proposed new § 208.35. The Board is

seeking public comment on proposed

§ 208.35 separately.

Section 208.37 Government Securities

Sales Practices

The final rule includes the text of

existing § 208.25, as issued in final by

the Board on March 19, 1997 (62 FR

13275) with an effective date of July 1,

1997. Existing § 208.25 remains

unchanged except that it is being

renumbered from § 208.25 to § 208.37.

Subpart D—Prompt Corrective Action

The proposed rule did not

significantly amend the terms of prior

Subpart B other than to redesignate it as

Subpart D and to amend § 208.41 to

provide the Federal Reserve with the

option of using period-end total assets

rather than average total assets for

purposes of defining total assets. The

Board received two comments regarding

Subpart D. The first commenter

inquired as to whether other

governmental agencies allow the option

of using period-end total assets rather

than average total assets for purposes of

defining total assets. In this regard the

Board notes that the OCC’s definition of

total assets, for purposes of its prompt

corrective action rule, is the same as the

Board’s.5

The second commenter stated that

§ 208.43(c)(2) should be updated to

reflect all applicable CAMELS

components. The Board has added

‘‘sensitivity to market risk’’ as the final

CAMELS component.

Subpart F—Miscellaneous

Requirements

Section 208.61 Bank Security

Procedures

Regulation P (12 CFR part 216), as

amended by the Board on May 1, 1991,

is being incorporated into Regulation H

at § 208.61. A final rule removing 12

CFR part 216 is found elsewhere in

today’s Federal Register.

Section 208.64 Frequency of

Examination

The final rule includes the text of

existing § 208.26, as issued in final by

the Board on April 2, 1998 (63 FR

16378), also effective on April 2, 1998).

Existing § 208.26 remains unchanged

except that it is being renumbered from

§ 208.26 to § 208.64.

Subpart G—Interpretations

Proposed § 208.101 Investments in

Federal Agricultural Mortgage

Corporation (Farmer Mac) Stock

This proposed interpretation restated

an existing staff opinion 6 regarding the

permissibility of banks investing in the

stock of the Federal Agricultural

Mortgage Corporation (Farmer Mac),

which is a government agency. One

commenter stated that the Board should

either provide a complete list of

permissible investments in stocks of

governmental agencies or provide no

list.

In general, banks are prohibited from

owning stock pursuant to paragraph

seventh of section 5136 of the Revised

Statutes (12 U.S.C. 24 ¶ 7th), which was

made applicable to State member banks

under paragraph 20 of § 9 of the Federal

Reserve Act (12 U.S.C. 335). Although

State member banks are generally

prohibited from owning stock, the Board

has, in the past, allowed banks to own

the stock of certain governmental

agencies where Congress has evidenced

a clear intention that banks be allowed

to hold such stock in order to achieve

a legislative purpose. Since decisions

regarding permissible stock investments

in governmental agencies must be made

on a case-by-case basis, the Board has

decided not to include proposed

§ 208.101 in the final rule. However, the

Board will retain the existing staff

opinion regarding investments in

Farmer Mac stock in the Federal Reserve

Regulatory Service.

Proposed Section 208.102 Investments

in Shares of an Investment Company

The Board proposed to retain its

existing interpretation, entitled

‘‘Purchase of investment company stock

by a State member bank,’’ and rename

it ‘‘Investments in Shares of an

Investment Company,’’ and renumber it

from § 208.124 to § 208.102. In addition,

the Board requested comment as to

whether the existing interpretation

should be amended to provide an

alternative limit for certain diversified

investment companies. Under the

alternative limit, a bank could elect not

to combine its pro rata interest in a

particular security held by an

investment company with the bank’s

direct holdings of the security where: (a)

the investment company’s holdings of

the securities of any one issuer do not

exceed 5 percent of its total portfolio;

and (b) the bank’s total holdings of the

investment company’s shares do not

exceed the most stringent limit

applicable to any of the securities in the
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37635

7See SR 95–17 (SUP), March 28, 1995.

company’s portfolio if those securities

were purchased directly by the bank.

This alternative limit is currently

available to national banks under OCC

rules.

Several commenters pointed to

conflicts between the Board’s

interpretation and the provisions of the

OCC’s Part 1 concerning investment

company shares and recommended that

the Board withdraw its interpretation in

order to avoid a conflict with the OCC

rules. Alternatively, these commenters

supported efforts to conform the Board’s

interpretation to the OCC’s current

provisions concerning investment

companies, including adoption of the

alternative limit and other conforming

amendments.

In addition to differences concerning

calculation of limits, the commenters

pointed out that the Board’s

interpretation generally permits

investment only in investment

companies that are registered with the

Securities and Exchange Commission

under the Investment Company Act of

1940 and the Securities Act of 1933,

while the OCC rule provides for case-bycase consideration of investment

companies that are exempt from

registration where the portfolio of the

investment companies consist entirely

of assets that a national bank may

purchase and sell for its own account.

Commenters also pointed out that the

OCC’s rule requires only that the

portfolio of the investment company

consist exclusively of assets that a

national bank could purchase directly.

The Board’s interpretation, on the other

hand, requires that limits on the

investment company’s authority be

included in the investment company’s

prospectus, which one commenter

argued prevented State member banks

from being able to ‘‘seed’’ start-up

investment companies where funds

were initially invested only in bank

eligible securities. The Board’s

interpretation also differs from the OCC

rule in other technical respects and

includes requirements that relate to

safety and soundness, rather than

investment authority.

The Board believes that State member

banks should be permitted to use the

alternative method of calculating

investment limits available under the

OCC’s rules for diversified investment

companies. Additionally, although the

circumstances under which a State

member bank may provide funds to

‘‘seed’’ an investment company are

limited, the Board believes that State

member banks should be permitted to

do so where the activity is consistent

with the Glass-Steagall Act. The Board

also notes that its interpretation was not

intended to preclude the consideration

on a case-by-case basis of investments

not covered by its interpretation,

including unregistered investment

companies.

With respect to the provisions of the

interpretation concerning internal

procedures for approval and

management of investments in

investment companies, guidance issued

by Board staff concerning risk

management practices related to

investment and end-user activities

provides more thorough guidance

concerning appropriate risk

management practices than was

available at the time the interpretation

was adopted.7 Further, internal

procedures and practices discussed in

current guidance cover the bank’s

investment activities generally and are

not limited to a particular area. The

Board therefore believes that the

specific internal procedures required

under the Board’s interpretation are no

longer necessary.

Based on the above considerations,

the Board has concluded that its

existing interpretation, § 208.124

(proposed § 208.102), no longer serves a

useful purpose and is rescinding it. The

Board is adding language to the

§ 208.21(b) on investments in securities

to clarify generally that, with respect to

certain investment company shares and

investment securities, a State member

bank may look to the OCC’s Part 1 rules

and interpretations to determine

whether a security qualifies as an

investment security for the purpose of

section 24, paragraph 7th, and for the

calculations of the limitations

applicable to such investments.

Regulation H also is being amended to

clarify that a State member bank should

consult the Board for determinations

with respect to issues concerning

investment securities that have not been

addressed by the OCC rules and

interpretations.

Section 208.101 Obligations

Concerning Institutional Customers

The final rule includes the text of

existing § 208.129, as issued in final by

the Board on March 19, 1997 (62 FR

13275). Existing § 208.129 remains

unchanged except that it is being

renumbered from § 208.129 to § 208.101.

Investments in operating subsidiaries.

Several commenters recommended that

the Board rescind its 1968 interpretation

concerning ‘‘operations subsidiaries,’’

published at 12 CFR 250.141, noting

that this interpretation was obsolete.

The interpretation states that a State

member bank may invest in the shares

of a wholly owned ‘‘operations

subsidiary’’ without violating the

provisions of the Glass-Steagall Act

concerning the purchase of stock by

member banks. At the present time the

Board is retaining the existing

interpretation regarding ‘‘operations

subsidiaries.’’

Miscellaneous. Financial Condition.

The Board proposed eliminating

existing § 208.17, entitled Disclosure of

Financial Information by State member

banks, from the proposed Regulation H

on the basis that call report information

for banks is now available through the

internet. In response to this proposal the

Board received three comments from

Federal Reserve Banks which stated that

it was premature to eliminate § 208.17

because a large segment of the public

does not have access to the internet. The

Board has decided to rescind § 208.17

despite these objections. The Board

believes that § 208.17 places a burden

on banks by requiring them to make

available a potentially unlimited

number of copies of statements

regarding their financial condition to

the public. This burden has been

justified in the past because it was the

only effective means for the public to

obtain information concerning a bank’s

financial condition. However, now that

many private institutions, as well as

many public institutions, such as public

libraries, offer access to the internet,

where such financial information

concerning banks can be obtained, the

Board does not believe the burden on

banks of providing such information

continues to be justified, and therefore,

is removing existing § 208.17 from the

final rule.

Final Regulatory Flexibility Analysis

Two of the three requirements of a

final regulatory flexibility analysis (5

U.S.C. 604), (1) a succinct statement of

the need for and the objectives of the

rule and (2) a summary of the issues

raised by the public comments, the

agency’s assessment of the issues, and a

statement of the changes made in the

final rule in response to the comments,

are discussed above. The third

requirement of a final regulatory

flexibility analysis is a description of

significant alternatives to the rule that

would minimize the rule’s economic

impact on small entities and reasons

why the alternatives were rejected.

The final amendments will apply to

all State member banks, which

numbered approximately 997 as of

February 1998, regardless of size, and

represent changes to the existing rules

that should reduce burden for those

institutions by reducing regulatory

filings, reducing the paperwork burden
37636 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

and processing time associated with

regulatory filings, reducing the costs

associated with complying with

regulation, and improving the ability of

banks to conduct business on a more

cost-efficient basis. For example, the

rule is generally designed to reduce

burden by removing out-dated material

and by re-organizing the remaining

material so it is easier to locate and to

read.

The rule also seeks to reduce burden

by incorporating expedited procedures

for membership and branch applications

for certain banks and by reducing the

processing period for expedited

applications from 5 to 3 days after the

close of the public comment period. In

addition, the rule expands the

circumstances under which the Board

will consider waivers of conditions of

membership, eliminates existing

requirements regarding disclosure of

financial condition, and eliminates the

requirement that banks obtain deposit

insurance in order to become State

member banks. The rule also provides

for an alternate definition of total assets

for institutions with rapidly declining

asset bases.

The amendments should not have a

negative economic effect on small

institutions, and, therefore, there were

no significant alternatives that would

have minimized the economic impact

on those institutions.

Paperwork Reduction Act

In accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3506;

5 CFR Part 1320 Appendix A.1), the

Board reviewed the final rule under the

authority delegated to the Board by the

Office of Management and Budget. The

Federal Reserve may not conduct or

sponsor, and an organization is not

required to respond to, these

information collections unless they

display a currently valid OMB control

number. The OMB control numbers for

the affected information collections are

7100–0097, 7100–0278, 7100–0046, and

7100–0139.

The sections of the regulation

pertaining to the revised information

collections are found in 12 CFR 208.2,

208.3, 208.6, 208.21, and 208.22. This

information is needed in order for the

Federal Reserve System to conduct its

supervisory responsibility for state

member banks. The respondents and

recordkeepers are state member banks.

Individual respondent data generally are

not regarded as confidential.

No comments specifically addressing

the burden estimate were received. Four

existing information collections covered

by Regulation H are affected by the

changes to the regulation. Fewer

Domestic Branch Notifications (FR

4001; OMB No. 7100–0097), which are

mandatory, will be submitted resulting

from the elimination of the notification

requirement for ATMs and certain other

offices and from the broadening of the

interpretation of ‘‘location.’’ The

proposed rule also had provided that

depository institutions be permitted to

file a single notification for prior

approval of multiple branches to be

established within a year following the

notification. The requirement for prior

approval was eliminated in the final

rule, which only requires notification

within thirty days after each branch is

opened. Further study, based on an

analysis of the types of notifications

received in the past, has led the Federal

Reserve to increase its initial estimate of

the effect of these changes on the annual

burden from a decrease of 20 percent to

more than 50 percent, from 415 to 201

hours.

The revisions to Regulation H are

expected to affect the relative

distribution of two of the types of

Reports Related to Public Welfare

Investments of State Member Banks

(OMB No. 7100–0278) that are

submitted to the Federal Reserve. The

Board is eliminating the requirement

that, to avoid applying for Board

approval, the investment must be

smaller than 2 percent of capital and

surplus. This should result in fewer

applications and more notices of

investments not requiring Board

approval. A requirement has been added

to the applications for Board approval:

if the bank is not permitted to make the

investment without Board approval, the

institution must explain the reason or

reasons why the investment is

ineligible. This is expected to increase

the burden per response from two and

one-half hours to two and three-quarters

hours. The estimated burden per

response for a notice of investment not

requiring Board approval is two hours.

There were twenty notices and fourteen

applications received during 1997. It is

estimated that following the revision

there will be twenty-seven notices and

seven applications submitted annually.

There is estimated to be no effect on the

divestiture notice requirements, one of

which is expected to be submitted

annually. The burden per response for

the divestiture notice is estimated to be

five hours. Altogether the total amount

of annual burden is estimated to be

reduced 3 percent from eighty hours to

seventy-eight. There is estimated to be

no annual cost burden over the annual

hour burden and no capital or start-up

costs associated with the changes.

The burden for the Membership

Application (FR 2083; OMB No. 7100–

0046) will experience a minimal

reduction in the current annual burden

of 3,450 hours, resulting from the

elimination of the publication

requirement, the broadened authority of

the Board to waive the application, and

the reduction in the processing time for

expedited applications from thirty to

fifteen days.

The final rule contains changes that

affect another existing information

collection. The proposed rule provided

that the Investment in Bank Premises

Notification (FR 4014; OMB No. 7100–

0139) must be filed by a state member

bank whenever it proposes to make an

investment in bank premises that results

in its total bank premises investment

exceeding its capital stock and surplus,

or if the bank is well capitalized and in

good condition, exceeding 150 percent

of its capital stock and surplus. In the

final rule, the Board decided to base its

analysis on the bank’s perpetual

preferred stock and related surplus plus

common stock plus surplus, which is a

more conservative measure than the

capital stock and surplus proposed

initially. In addition, after-the-fact

notification is no longer required from

banks for investments within the limits.

The net effect of these changes is

expected to have a minimal effect on the

annual respondent burden for this

information collection of eight hours.

The Federal Reserve has a continuing

interest in the public’s opinions of our

collections of information. At any time,

comments regarding the burden

estimate, or any other aspect of these

collections of information, including

suggestions for reducing the burden,

may be sent to: Secretary, Board of

Governors of the Federal Reserve

System, 20th and C Streets, N.W.,

Washington, DC 20551; and to the

Office of Management and Budget,

Paperwork Reduction Project (7100–

0097, 7100–0278, 7100–0046, or 7100–

0139), Washington, DC 20503.

Derivation Table

This table directs readers to the

provision(s) of existing Regulation H, if

any, upon which the proposed

provision is based.

Revised provision Original provision

208.1 ......................... None

208.2 ......................... 208.1

208.3(a) ..................... 208.2

208.3(b) ..................... 208.4, 208.5

208.3(c) ..................... 208.5

208.3(d) ..................... added

208.3(e) ..................... 208.7

208.3(f) ...................... 208.10

208.3(g) ..................... 208.11

208.4 ......................... 208.13

208.5 ......................... 208.19
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37637

1Under section 2 of the Federal Reserve Act,

every national bank in any state shall, upon

commencing business, or within 90 days after

admission into the Union of the State in which it

is located, become a member of the System. Under

section 19 of the Federal Reserve Act, national

banks and banks organized under local laws,

located in a dependency or insular possession or

any part of the United States outside of the States

of the United States and the District of Columbia,

are not required to become members of the System

but may, with the consent of the board, become

members of the System.

Revised provision Original provision

208.6(a) ..................... 208.9

208.6(b) ..................... None

208.6(c) ..................... None

208.6(d) ..................... None

208.6(e) ..................... 208.9(b)(7)

208.6(f) ...................... None

208.7 ......................... 208.28

208.20 ....................... None

208.21 ....................... None

208.22 ....................... 208.21

208.23 ....................... 208.15

208.24 ....................... 208.8(d)

208.25 ....................... 208.23

208.30 ....................... None

208.31 ....................... 208.8(f)

208.32 ....................... 208.8(h), 208.8(i)

208.33 ....................... 208.8(g)

208.34 ....................... 208.24

208.35 ....................... None

208.36 ....................... 208.16

208.37 ....................... 208.25

208.40 ....................... 208.30

208.41 ....................... 208.31

208.42 ....................... 208.32

208.43 ....................... 208.33

208.44 ....................... 208.34

208.45 ....................... 208.35

208.50 ....................... 208.51

208.51 ....................... 208.52

208.60 ....................... None

208.61 ....................... None

208.62 ....................... 208.20

208.63 ....................... 208.14

208.64 ....................... 208.26

208.100 ..................... 208.116

208.101 ..................... 208.129

List of Subjects

12 CFR Part 208

Accounting, Agriculture, Banks,

Banking, Confidential business

information, Crime, Currency, Federal

Reserve System, Mortgages, Reporting

and recordkeeping requirements,

Securities.

12 CFR Part 250

Federal Reserve System.

For the reasons set forth in the

preamble, the Board is amending

chapter II of title 12 of the Code of

Federal Regulations as follows:

PART 208—MEMBERSHIP OF STATE

BANKING INSTITUTIONS IN THE

FEDERAL RESERVE SYSTEM

(REGULATION H)

1. The authority citation for part 208

is revised to read as follows:

Authority: 12 U.S.C. 24, 36, 92a, 93a,

248(a), 248(c), 321–338a, 371d, 461, 481–486,

601, 611, 1814, 1816, 1818, 1823(j), 1828(o),

1831o, 1831p–1, 1831r–1, 1835a, 1882, 2901–

2907, 3105, 3310, 3331–3351, and 3906–

3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i),

78o–4(c)(5), 78q, 78q–1, and 78w; 31 U.S.C.

5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106

and 4128.

2. The table of contents to part 208 is

revised to read as follows:

Subpart A—General Membership and

Branching Requirements

Sec.

208.1 Authority, purpose, and scope.

208.2 Definitions.

208.3 Application and conditions for

membership in the Federal Reserve

System.

208.4 Capital adequacy.

208.5 Dividends and other distributions.

208.6 Establishment and maintenance of

branches.

208.7 Prohibition against use of interstate

branches primarily for deposit

production.

Subpart B—Investments and Loans

208.20 Authority, purpose, and scope.

208.21 Investments in premises and

securities.

208.22 Community development and public

welfare investments.

208.23 Agricultural loan loss amortization.

208.24 Letters of credit and acceptances.

208.25 Loans in areas having special flood

hazards.

Subpart C—Bank Securities and SecuritiesRelated Activities

208.30 Authority, purpose, and scope.

208.31 State member banks as transfer

agents.

208.32 Notice of disciplinary sanctions

imposed by registered clearing agency.

208.33 Application for stay or review of

disciplinary sanctions imposed by

registered clearing agency.

208.34 Recordkeeping and confirmation of

certain securities transactions effected by

State member banks.

208.35 Qualification requirements for

transactions in certain securities.

[Reserved]

208.36 Reporting requirements for State

member banks subject to the Securities

Exchange Act of 1934.

208.37 Government securities sales

practices.

Subpart D—Prompt Corrective Action

208.40 Authority, purpose, scope, other

supervisory authority, and disclosure of

capital categories.

208.41 Definitions for purposes of this

subpart.

208.42 Notice of capital category.

208.43 Capital measures and capital

category definitions.

208.44 Capital restoration plans.

208.45 Mandatory and discretionary

supervisory actions under section 38.

Subpart E—Real Estate Lending and

Appraisal Standards

208.50 Authority, purpose, and scope.

208.51 Real estate lending standards.

Subpart F—Miscellaneous Requirements

208.60 Authority, purpose, and scope.

208.61 Bank security procedures.

208.62 Suspicious activity reports.

208.63 Procedures for monitoring Bank

Secrecy Act compliance.

208.64 Frequency of examination.

Subpart G—Interpretations

208.100 Sale of bank’s money orders off

premises as establishment of branch

office.

208.101 Obligations concerning

institutional customers.

Appendix A to Part 208—Capital Adequacy

Guidelines for State Member Banks: RiskBased Measure

Appendix B to Part 208—Capital Adequacy

Guidelines for State Member Banks: Tier 1

Leverage Measure

Appendix C to Part 208—Interagency

Guidelines for Real Estate Lending Policies

Appendix D to Part 208—Interagency

Guidelines Establishing Standards for Safety

and Soundness

Appendix E to Part 208—Capital Adequacy

Guidelines for State Member Banks: Market

Risk Measure

3. Subparts A through E are revised

and Subparts F and G are added to read

as follows:

Subpart A—General Membership and

Branching Requirements

§ 208.1 Authority, purpose, and scope.

(a) Authority. Subpart A of Regulation

H (12 CFR part 208, Subpart A) is issued

by the Board of Governors of the Federal

Reserve System (Board) under 12 U.S.C.

24, 36; sections 9, 11, 21, 25 and 25A

of the Federal Reserve Act (12 U.S.C.

321–338a, 248(a), 248(c), 481–486, 601

and 611); sections 1814, 1816, 1818,

1831o, 1831p–1, 1831r–1 and 1835a of

the Federal Deposit Insurance Act (FDI

Act) (12 U.S.C. 1814, 1816, 1818, 1831o,

1831p–1, 1831r–1, and 1835); and 12

U.S.C. 3906–3909.

(b) Purpose and scope of Part 208.

The requirements of this part 208

govern State member banks and state

banks applying for admission to

membership in the Federal Reserve

System (System) under section 9 of the

Federal Reserve Act (Act), except for

§ 208.7, which also applies to certain

foreign banks licensed by a State. This

part 208 does not govern banks eligible

for membership under section 2 or 19 of

the Act.1 Any bank desiring to be

admitted to the System under the

provisions of section 2 or 19 should

communicate with the Federal Reserve
37638 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

2A mutual savings bank not authorized to

purchase Federal Reserve Bank stock may apply for

membership evidenced initially by a deposit, but if

the laws under which the bank is organized are not

amended at the first session of the legislature after

its admission to authorize the purchase, or if the

bank fails to purchase the stock within six months

of the amendment, its membership shall be

terminated.

Bank with which it would like to

become a member.

(c) Purpose and scope of Subpart A.

This Subpart A describes the eligibility

requirements for membership of statechartered banking institutions in the

System, the general conditions imposed

upon members, including capital and

dividend requirements, as well as the

requirements for establishing and

maintaining branches.

§ 208.2 Definitions.

For the purposes of this part:

(a) Board of Directors means the

governing board of any institution

performing the usual functions of a

board of directors.

(b) Board means the Board of

Governors of the Federal Reserve

System.

(c) Branch. (1) Branch means any

branch bank, branch office, branch

agency, additional office, or any branch

place of business that receives deposits,

pays checks, or lends money. A branch

may include a temporary, seasonal, or

mobile facility that meets these criteria.

(2) Branch does not include:

(i) A loan origination facility where

the proceeds of loans are not disbursed;

(ii) An office of an affiliated or

unaffiliated institution that provides

services to customers of the member

bank on behalf of the member bank so

long as the institution is not established

or operated by the bank;

(iii) An automated teller machine;

(iv) A remote service unit;

(v) A facility to which the bank does

not permit members of the public to

have physical access for purposes of

making deposits, paying checks, or

borrowing money (such as an office

established by the bank that receives

deposits only through the mail); or

(vi) A facility that is located at the site

of, or is an extension of, an approved

main office or branch. The Board

determines whether a facility is an

extension of an existing main or branch

office on a case-by-case basis.

(d) Capital stock and surplus means,

unless otherwise provided in this part,

or by statute, Tier 1 and Tier 2 capital

included in a member bank’s risk-based

capital (under the guidelines in

appendix A of this part) and the balance

of a member bank’s allowance for loan

and lease losses not included in its Tier

2 capital for calculation of risk-based

capital, based on the bank’s most recent

consolidated Report of Condition and

Income filed under 12 U.S.C. 324.

(e) Eligible bank means a member

bank that:

(1) Is well capitalized as defined in

subpart D of this part;

(2) Has a composite Uniform

Financial Institutions Rating System

(CAMELS) rating of 1 or 2;

(3) Has a Community Reinvestment

Act (CRA) (12 U.S.C. 2906) rating of

‘‘Outstanding’’ or ‘‘Satisfactory;’’

(4) Has a compliance rating of 1 or 2;

and

(5) Has no major unresolved

supervisory issues outstanding (as

determined by the Board or appropriate

Federal Reserve Bank in its discretion).

(f) State bank means any bank

incorporated by special law of any State,

or organized under the general laws of

any State, or of the United States,

including a Morris Plan bank, or other

incorporated banking institution

engaged in a similar business.

(g) State member bank or member

bank means a state bank that is a

member of the Federal Reserve System.

§ 208.3 Application and conditions for

membership in the Federal Reserve System.

(a) Applications for membership and

stock. (1) State banks applying for

membership in the Federal Reserve

System shall file with the appropriate

Federal Reserve Bank an application for

membership in the Federal Reserve

System and for stock in the Reserve

Bank,2 in accordance with this part and

§ 262.3 of the Rules of Procedure,

located at 12 CFR 262.3.

(2) Board approval. If an applying

bank conforms to all the requirements of

the Federal Reserve Act and this

section, and is otherwise qualified for

membership, the Board may approve its

application subject to such conditions

as the Board may prescribe.

(3) Effective date of membership. A

State bank becomes a member of the

Federal Reserve System on the date its

Federal Reserve Bank stock is credited

to its account (or its deposit is accepted,

if it is a mutual savings bank not

authorized to purchase Reserve Bank

stock) in accordance with the Board’s

Regulation I (12 CFR part 209).

(b) Factors considered in approving

applications for membership. Factors

given special consideration by the Board

in passing upon an application are:

(1) Financial condition and

management. The financial history and

condition of the applying bank and the

general character of its management.

(2) Capital. The adequacy of the

bank’s capital in accordance with

§ 208.4, and its future earnings

prospects.

(3) Convenience and needs. The

convenience and needs of the

community.

(4) Corporate powers. Whether the

bank’s corporate powers are consistent

with the purposes of the Federal

Reserve Act.

(c) Expedited approval for eligible

banks and bank holding companies. (1)

Availability of expedited treatment. The

expedited membership procedures

described in paragraph (c)(2) of this

section are available to:

(i) An eligible bank; and

(ii) A bank that cannot be determined

to be an eligible bank because it has not

received compliance or CRA ratings

from a bank regulatory authority, if it is

controlled by a bank holding company

that meets the criteria for expedited

processing under § 225.14(c) of

Regulation Y (12 CFR 225.14(c)).

(2) Expedited procedures. A

completed membership application

filed with the appropriate Reserve Bank

will be deemed approved on the

fifteenth day after receipt of the

complete application by the Board or

appropriate Reserve Bank, unless the

Board or the appropriate Reserve Bank

notifies the bank that the application is

approved prior to that date or the Board

or the appropriate Federal Reserve Bank

notifies the bank that the application is

not eligible for expedited review for any

reason, including, without limitation,

that:

(i) The bank will offer banking

services that are materially different

from those currently offered by the

bank, or by the affiliates of the proposed

bank;

(ii) The bank or bank holding

company does not meet the criteria

under § 208.3(c)(1);

(iii) The application contains a

material error or is otherwise deficient;

or

(iv) The application raises significant

supervisory, compliance, policy or legal

issues that have not been resolved, or a

timely substantive adverse comment is

submitted. A comment will be

considered substantive unless it

involves individual complaints, or

raises frivolous, previously considered,

or wholly unsubstantiated claims or

irrelevant issues.

(d) Conditions of membership. (1)

Safety and soundness. Each member

bank shall at all times conduct its

business and exercise its powers with

due regard to safety and soundness.

(The Interagency Guidelines

Establishing Standards for Safety and

Soundness prescribed pursuant to

section 39 of the FDI Act (12 U.S.C.
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37639

3 In the case of dividends in excess of net income

for the year, a bank generally is not required to

carry forward negative amounts resulting from such

excess. Instead, the bank may attribute the excess

to the prior two years, attributing the excess first to

the earlier year and then to the immediately

preceding year. If the excess is greater than the

bank’s previously undistributed net income for the

preceding two years, prior Board approval of the

dividend is required and a negative amount would

be carried forward in future dividend calculations.

However, in determining any such request for

approval, the Board could consider any request for

different treatment of such negative amount,

including advance waivers for future periods. This

applies only to earnings deficits that result from

dividends declared in excess of net income for the

year and does not apply to other types of current

earnings deficits.

4State member banks are required to comply with

state law provisions concerning the maintenance of

surplus funds in addition to common capital.

Where the surplus of a State member bank is less

than what applicable state law requires the bank to

maintain relative to its capital stock account, the

bank may be required to transfer amounts from its

undivided profits account to surplus.

1831p–1), as set forth as appendix D to

this part apply to all member banks.)

(2) General character of bank’s

business. A member bank may not,

without the permission of the Board,

cause or permit any change in the

general character of its business or in

the scope of the corporate powers it

exercises at the time of admission to

membership.

(3) Compliance with conditions of

membership. Each member bank shall

comply at all times with this Regulation

H (12 CFR part 208) and any other

conditions of membership prescribed by

the Board.

(e) Waivers. (1) Conditions of

membership. A member bank may

petition the Board to waive a condition

of membership. The Board may grant a

waiver of a condition of membership

upon a showing of good cause and, in

its discretion, may limit, among other

items, the scope, duration, and timing of

the waiver.

(2) Reports of affiliates. Pursuant to

section 21 of the Federal Reserve Act

(12 U.S.C. 486), the Board waives the

requirement for the submission of

reports of affiliates of member banks,

unless such reports are specifically

requested by the Board.

(f) Voluntary withdrawal from

membership. Voluntary withdrawal

from membership becomes effective

upon cancellation of the Federal

Reserve Bank stock held by the member

bank, and after the bank has made due

provision to pay any indebtedness due

or to become due to the Federal Reserve

Bank in accordance with the Board’s

Regulation I (12 CFR part 209).

§ 208.4 Capital adequacy.

(a) Adequacy. A member bank’s

capital, as defined in appendix A to this

part, shall be at all times adequate in

relation to the character and condition

of its assets and to its existing and

prospective liabilities and other

corporate responsibilities. If at any time,

in light of all the circumstances, the

bank’s capital appears inadequate in

relation to its assets, liabilities, and

responsibilities, the bank shall increase

the amount of its capital, within such

period as the Board deems reasonable,

to an amount which, in the judgment of

the Board, shall be adequate.

(b) Standards for evaluating capital

adequacy. Standards and guidelines by

which the Board evaluates the capital

adequacy of member banks include

those in appendices A and E to this part

for risk-based capital purposes and

appendix B to this part for leverage

measurement purposes.

§ 208.5 Dividends and other distributions.

(a) Definitions. For the purposes of

this section:

(1) Capital surplus means the total of

surplus as reportable in the bank’s

Reports of Condition and Income and

surplus on perpetual preferred stock.

(2) Permanent capital means the total

of the bank’s perpetual preferred stock

and related surplus, common stock and

surplus, and minority interest in

consolidated subsidiaries, as reportable

in the Reports of Condition and Income.

(b) Limitations. The limitations in this

section on the payment of dividends

and withdrawal of capital apply to all

cash and property dividends or

distributions on common or preferred

stock. The limitations do not apply to

dividends paid in the form of common

stock.

(c) Earnings limitations on payment of

dividends. (1) A member bank may not

declare or pay a dividend if the total of

all dividends declared during the

calendar year, including the proposed

dividend, exceeds the sum of the bank’s

net income (as reportable in its Reports

of Condition and Income) during the

current calendar year and the retained

net income of the prior two calendar

years, unless the dividend has been

approved by the Board.

(2) ‘‘Retained net income’’ in a

calendar year is equal to the bank’s net

income (as reported in its Report of

Condition and Income for such year),

less any dividends declared during such

year.3 The bank’s net income during the

current year and its retained net income

from the prior two calendar years is

reduced by any net losses incurred in

the current or prior two years and any

required transfers to surplus or to a fund

for the retirement of preferred stock.4

(d) Limitation on withdrawal of

capital by dividend or otherwise. (1) A

member bank may not declare or pay a

dividend if the dividend would exceed

the bank’s undivided profits as

reportable on its Reports of Condition

and Income, unless the bank has

received the prior approval of the Board

and of at least two-thirds of the

shareholders of each class of stock

outstanding.

(2) A member bank may not permit

any portion of its permanent capital to

be withdrawn unless the withdrawal

has been approved by the Board and by

at least two-thirds of the shareholders of

each class of stock outstanding.

(3) If a member bank has capital

surplus in excess of that required by

law, the excess amount may be

transferred to the bank’s undivided

profits account and be available for the

payment of dividends if:

(i) The amount transferred came from

the earnings of prior periods, excluding

earnings transferred as a result of stock

dividends;

(ii) The bank’s board of directors

approves the transfer of funds; and

(iii) The transfer has been approved

by the Board.

(e) Payment of capital distributions.

All member banks also are subject to the

restrictions on payment of capital

distributions contained in § 208.45 of

subpart D of this part implementing

section 38 of the FDI Act (12 U.S.C.

1831o).

(f) Compliance. A member bank shall

use the date a dividend is declared to

determine compliance with this section.

§ 208.6 Establishment and maintenance of

branches.

(a) Branching. (1) To the extent

authorized by state law, a member bank

may establish and maintain branches

(including interstate branches) subject

to the same limitations and restrictions

that apply to the establishment and

maintenance of national bank branches

(12 U.S.C. 36 and 1831u), except that

approval of such branches shall be

obtained from the Board rather than

from the Comptroller of the Currency.

(2) Branch applications. A State

member bank wishing to establish a

branch in the United States or its

territories must file an application in

accordance with the Board’s Rules of

Procedure, located at 12 CFR 262.3, and

must comply with the public notice and

comment rules contained in paragraphs

(a)(3) and (a)(4) of this section. Branches

of member banks located in foreign

nations, in the overseas territories,

dependencies, and insular possessions

of those nations and of the United

States, and in the Commonwealth of
37640 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

Puerto Rico, are subject to the Board’s

Regulation K (12 CFR part 211).

(3) Public notice of branch

applications. (i) Location of publication.

A State member bank wishing to

establish a branch in the United States

or its territories must publish notice in

a newspaper of general circulation in

the form and at the locations specified

in § 262.3 of the Rules of Procedure (12

CFR 262.3).

(ii) Contents of notice. The newspaper

notice referred to in paragraph (a)(3) of

this section shall provide an

opportunity for interested persons to

comment on the application for a period

of at least 15 days.

(iii) Timing of publication. Each

newspaper notice shall be published no

more than 7 calendar days before and no

later than the calendar day on which an

application is filed with the appropriate

Reserve Bank.

(4) Public comment. (i) Timely

comments. Interested persons may

submit information and comments

regarding a branch application under

§ 208.6. A comment shall be considered

timely for purposes of this subpart if the

comment, together with all

supplemental information, is submitted

in writing in accordance with the

Board’s Rules of Procedure (12 CFR

262.3) and received by the Board or the

appropriate Reserve Bank prior to the

expiration of the public comment period

provided in paragraph (a)(3)(ii) of this

section.

(ii) Extension of comment period. The

Board may, in its discretion, extend the

public comment period regarding any

application under § 208.6. In the event

that an interested person requests a

copy of an application submitted under

§ 208.6, the Board may, in its discretion

and based on the facts and

circumstances, grant such person an

extension of the comment period for up

to 15 calendar days.

(b) Factors considered in approving

domestic branch applications. Factors

given special consideration by the Board

in passing upon a branch application

are:

(1) Financial condition and

management. The financial history and

condition of the applying bank and the

general character of its management;

(2) Capital. The adequacy of the

bank’s capital in accordance with

§ 208.4, and its future earnings

prospects;

(3) Convenience and needs. The

convenience and needs of the

community to be served by the branch;

(4) CRA performance. In the case of

branches with deposit-taking capability,

the bank’s performance under the

Community Reinvestment Act (12

U.S.C. 2901 et seq.) and Regulation BB

(12 CFR part 228); and

(5) Investment in bank premises.

Whether the bank’s investment in bank

premises in establishing the branch is

consistent with § 208.21.

(c) Expedited approval for eligible

banks and bank holding companies. (1)

Availability of expedited treatment. The

expedited branch application

procedures described in paragraph (c)(2)

of this section are available to:

(i) An eligible bank; and

(ii) A bank that cannot be determined

to be an eligible bank because it has not

received compliance or CRA ratings

from a bank regulatory authority, if it is

controlled by a bank holding company

that meets the criteria for expedited

processing under § 225.14(c) of

Regulation Y (12 CFR 225.14(c)).

(2) Expedited procedures. A

completed domestic branch application

filed with the appropriate Reserve Bank

will be deemed approved on the fifth

day after the close of the comment

period, unless the Board or the

appropriate Reserve Bank notifies the

bank that the application is approved

prior to that date (but in no case will an

application be approved before the third

day after the close of the public

comment period) or the Board or the

appropriate Federal Reserve Bank

notifies the bank that the application is

not eligible for expedited review for any

reason, including, without limitation,

that:

(i) The bank or bank holding company

does not meet the criteria under

§ 208.6(c)(1);

(ii) The application contains a

material error or is otherwise deficient;

or

(iii) The application or the notice

required under paragraph (a)(3) of this

section, raises significant supervisory,

Community Reinvestment Act,

compliance, policy or legal issues that

have not been resolved, or a timely

substantive adverse comment is

submitted. A comment will be

considered substantive unless it

involves individual complaints, or

raises frivolous, previously considered,

or wholly unsubstantiated claims or

irrelevant issues.

(d) Consolidated Applications. (1)

Proposed branches; notice of branch

opening. A member bank may seek

approval in a single application or

notice for any branches that it proposes

to establish within one year after the

approval date. The bank shall, unless

notification is waived, notify the

appropriate Reserve Bank not later than

30 days after opening any branch

approved under a consolidated

application. A bank is not required to

open a branch approved under either a

consolidated or single branch

application.

(2) Duration of branch approval.

Branch approvals remain valid for one

year unless the Board or the appropriate

Reserve Bank notifies the bank that in

its judgment, based on reports of

condition, examinations, or other

information, there has been a change in

the bank’s condition, financial or

otherwise, that warrants reconsideration

of the approval.

(e) Branch closings. A member bank

shall comply with section 42 of the FDI

Act (FDI Act), 12 U.S.C. 1831r–1, with

regard to branch closings.

(f) Branch relocations. A relocation of

an existing branch does not require

filing a branch application. A relocation

of an existing branch, for purposes of

determining whether to file a branch

application, is a movement that does not

substantially affect the nature of the

branch’s business or customers served.

§ 208.7 Prohibition against use of

interstate branches primarily for deposit

production.

(a) Purpose and scope—(1) Purpose.

The purpose of this section is to

implement section 109 (12 U.S.C.

1835a) of the Riegle-Neal Interstate

Banking and Branching Efficiency Act

of 1994 (Interstate Act).

(2) Scope. (i) This section applies to

any State member bank that has

operated a covered interstate branch for

a period of at least one year, and any

foreign bank that has operated a covered

interstate branch licensed by a State for

a period of at least one year.

(ii) This section describes the

requirements imposed under 12 U.S.C.

1835a, which requires the appropriate

Federal banking agencies (the Board, the

Office of the Comptroller of the

Currency, and the Federal Deposit

Insurance Corporation) to prescribe

uniform rules that prohibit a bank from

using any authority to engage in

interstate branching pursuant to the

Interstate Act, or any amendment made

by the Interstate Act to any other

provision of law, primarily for the

purpose of deposit production.

(b) Definitions. For purposes of this

section, the following definitions apply:

(1) Bank means, unless the context

indicates otherwise:

(i) A State member bank as that term

is defined in 12 U.S.C. 1813(d)(2); and

(ii) A foreign bank as that term is

defined in 12 U.S.C. 3101(7) and 12 CFR

211.21.

(2) Covered interstate branch means

any branch of a State member bank, and

any uninsured branch of a foreign bank

licensed by a State, that:
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37641

(i) Is established or acquired outside

the bank’s home state pursuant to the

interstate branching authority granted

by the Interstate Act or by any

amendment made by the Interstate Act

to any other provision of law; or

(ii) Could not have been established

or acquired outside of the bank’s home

state but for the establishment or

acquisition of a branch described in

paragraph (b)(2)(i) of this section.

(3) Home state means:

(i) With respect to a state bank, the

state that chartered the bank;

(ii) With respect to a national bank,

the state in which the main office of the

bank is located; and

(iii) With respect to a foreign bank,

the home state of the foreign bank as

determined in accordance with 12

U.S.C. 3103(c) and 12 CFR 211.22.

(4) Host state means a state in which

a bank establishes or acquires a covered

interstate branch.

(5) Host state loan-to-deposit ratio

generally means, with respect to a

particular host state, the ratio of total

loans in the host state relative to total

deposits from the host state for all banks

(including institutions covered under

the definition of ‘‘bank’’ in 12 U.S.C.

1813(a)(1)) that have that state as their

home state, as determined and updated

periodically by the appropriate Federal

banking agencies and made available to

the public.

(6) State means state as that term is

defined in 12 U.S.C. 1813(a)(3).

(7) Statewide loan-to-deposit ratio

means, with respect to a bank, the ratio

of the bank’s loans to its deposits in a

state in which the bank has one or more

covered interstate branches, as

determined by the Board.

(c) Loan-to-deposit ratio screen—(1)

Application of screen. Beginning no

earlier than one year after a bank

establishes or acquires a covered

interstate branch, the Board will

consider whether the bank’s statewide

loan-to-deposit ratio is less than 50

percent of the relevant host state loanto-deposit ratio.

(2) Results of screen. (i) If the Board

determines that the bank’s statewide

loan-to-deposit ratio is 50 percent or

more of the host state loan-to-deposit

ratio, no further consideration under

this section is required.

(ii) If the Board determines that the

bank’s statewide loan-to-deposit ratio is

less than 50 percent of the host state

loan-to-deposit ratio, or if reasonably

available data are insufficient to

calculate the bank’s statewide loan-todeposit ratio, the Board will make a

credit needs determination for the bank

as provided in paragraph (d) of this

section.

(d) Credit needs determination—(1) In

general. The Board will review the loan

portfolio of the bank and determine

whether the bank is reasonably helping

to meet the credit needs of the

communities in the host state that are

served by the bank.

(2) Guidelines. The Board will use the

following considerations as guidelines

when making the determination

pursuant to paragraph (d)(1) of this

section:

(i) Whether covered interstate

branches were formerly part of a failed

or failing depository institution;

(ii) Whether covered interstate

branches were acquired under

circumstances where there was a low

loan-to-deposit ratio because of the

nature of the acquired institution’s

business or loan portfolio;

(iii) Whether covered interstate

branches have a high concentration of

commercial or credit card lending, trust

services, or other specialized activities,

including the extent to which the

covered interstate branches accept

deposits in the host state;

(iv) The Community Reinvestment

Act ratings received by the bank, if any,

under 12 U.S.C. 2901 et seq.;

(v) Economic conditions, including

the level of loan demand, within the

communities served by the covered

interstate branches;

(vi) The safe and sound operation and

condition of the bank; and

(vii) The Board’s Regulation BB—

Community Reinvestment (12 CFR part

228) and interpretations of that

regulation.

(e) Sanctions—(1) In general. If the

Board determines that a bank is not

reasonably helping to meet the credit

needs of the communities served by the

bank in the host state, and that the

bank’s statewide loan-to-deposit ratio is

less than 50 percent of the host state

loan-to-deposit ratio, the Board:

(i) May order that a bank’s covered

interstate branch or branches be closed

unless the bank provides reasonable

assurances to the satisfaction of the

Board, after an opportunity for public

comment, that the bank has an

acceptable plan under which the bank

will reasonably help to meet the credit

needs of the communities served by the

bank in the host state; and

(ii) Will not permit the bank to open

a new branch in the host state that

would be considered to be a covered

interstate branch unless the bank

provides reasonable assurances to the

satisfaction of the Board, after an

opportunity for public comment, that

the bank will reasonably help to meet

the credit needs of the community that

the new branch will serve.

(2) Notice prior to closure of a covered

interstate branch. Before exercising the

Board’s authority to order the bank to

close a covered interstate branch, the

Board will issue to the bank a notice of

the Board’s intent to order the closure

and will schedule a hearing within 60

days of issuing the notice.

(3) Hearing. The Board will conduct a

hearing scheduled under paragraph

(e)(2) of this section in accordance with

the provisions of 12 U.S.C. 1818(h) and

12 CFR part 263.

Subpart B—Investments and Loans

§ 208.20 Authority, purpose, and scope.

(a) Authority. Subpart B of Regulation

H (12 CFR part 208, subpart B) is issued

by the Board of Governors of the Federal

Reserve System under 12 U.S.C. 24;

sections 9, 11 and 21 of the Federal

Reserve Act (12 U.S.C. 321–338a, 248(a),

248(c), and 481–486); sections 1814,

1816, 1818, 1823(j), 1831o, 1831p–1 and

1831r–1 of the FDI Act (12 U.S.C. 1814,

1816, 1818, 1823(j), 1831o, 1831p–1 and

1831r–1); and the National Flood

Insurance Act of 1968 and the Flood

Disaster Protection Act of 1973, as

amended (42 U.S.C. 4001–4129).

(b) Purpose and scope. This subpart B

describes certain investment limitations

on member banks, statutory

requirements for amortizing losses on

agricultural loans and extending credit

in areas having special flood hazards, as

well as the requirements for issuing

letters of credit and acceptances.

§ 208.21 Investments in premises and

securities.

(a) Investment in bank premises. No

state member bank shall invest in bank

premises, or in the stock, bonds,

debentures, or other such obligations of

any corporation holding the premises of

such bank, or make loans to or upon the

security of any such corporation unless:

(1) The bank notifies the appropriate

Reserve Bank at least fifteen days prior

to such investment and has not received

notice that the investment is subject to

further review by the end of the fifteen

day notice period;

(2) The aggregate of all such

investments and loans, together with the

amount of any indebtedness incurred by

any such corporation that is an affiliate

of the bank (as defined in section 2 of

the Banking Act of 1933, as amended,

12 U.S.C. 221a), is less than or equal to

the bank’s perpetual preferred stock and

related surplus plus common stock plus

surplus, as those terms are defined in

the FFIEC Consolidated Reports of

Condition and Income; or

(3)(i) The aggregate of all such

investments and loans, together with the
37642 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

5See FRRS 3–1575 for an explanation of the

Uniform Interagency Bank Rating System. (For

availability, see 12 CFR 261.10(f).)

amount of any indebtedness incurred by

any such corporation that is an affiliate

of the bank, is less than or equal to 150

percent of the bank’s perpetual

preferred stock and related surplus plus

common stock plus surplus, as those

terms are defined in the FFIEC

Consolidated Reports of Condition and

Income; and

(ii) The bank:

(A) Has a CAMELS composite rating

of 1 or 2 under the Uniform Interagency

Bank Rating System 5 (or an equivalent

rating under a comparable rating

system) as of the most recent

examination of the bank; and

(B) Is well capitalized and will

continue to be well capitalized, in

accordance with subpart D of this part,

after the investment or loan.

(b) Investments in securities. Member

banks are subject to the same limitations

and conditions with respect to

purchasing, selling, underwriting, and

holding investment securities and

stocks as are national banks under 12

U.S.C. 24, ¶ 7th. To determine whether

an obligation qualifies as an investment

security for the purposes of 12 U.S.C.

24, ¶ 7th, and to calculate the limits

with respect to the purchase of such

obligations, a state member bank may

look to part 1 of the rules of the

Comptroller of the Currency (12 CFR

part 1) and interpretations thereunder.

A state member bank may consult the

Board for a determination with respect

to the application of 12 U.S.C. 24, ¶ 7th,

with respect to issues not addressed in

12 CFR part 1. The provisions of 12 CFR

part 1 do not provide authority for a

state member bank to purchase

securities of a type or amount that the

bank is not authorized to purchase

under applicable state law.

§ 208.22 Community development and

public welfare investments.

(a) Definitions. For purposes of this

section:

(1) Low- or moderate-income area

means:

(i) One or more census tracts in a

Metropolitan Statistical Area where the

median family income adjusted for

family size in each census tract is less

than 80 percent of the median family

income adjusted for family size of the

Metropolitan Statistical Area; or

(ii) If not in a Metropolitan Statistical

Area, one or more census tracts or

block-numbered areas where the median

family income adjusted for family size

in each census tract or block-numbered

area is less than 80 percent of the

median family income adjusted for

family size of the State.

(2) Low- and moderate-income

persons has the same meaning as lowand moderate-income persons as

defined in 42 U.S.C. 5302(a)(20)(A).

(3) Small business means a business

that meets the size-eligibility standards

of 13 CFR 121.802(a)(2).

(b) Investments not requiring prior

Board approval. Notwithstanding the

provisions of section 5136 of the

Revised Statutes (12 U.S.C. 24, ¶ 7th)

made applicable to member banks by

paragraph 20 of section 9 of the Federal

Reserve Act (12 U.S.C. 335), a member

bank may make an investment, without

prior Board approval, if the following

conditions are met:

(1) The investment is in a corporation,

limited partnership, or other entity, and:

(i) The Board has determined that an

investment in that entity or class of

entities is a public welfare investment

under paragraph 23 of section 9 of the

Federal Reserve Act (12 U.S.C. 338a), or

a community development investment

under Regulation Y (12 CFR

225.25(b)(6)); or

(ii) The Comptroller of the Currency

has determined, by order or regulation,

that an investment in that entity by a

national bank is a public welfare

investment under section 5136 of the

Revised Statutes (12 U.S.C. 24

(Eleventh)); or

(iii) The entity is a community

development financial institution as

defined in section 103(5) of the

Community Development Banking and

Financial Institutions Act of 1994 (12

U.S.C. 4702(5)); or

(iv) The entity, directly or indirectly,

engages solely in or makes loans solely

for the purposes of one or more of the

following community development

activities:

(A) Investing in, developing,

rehabilitating, managing, selling, or

renting residential property if a majority

of the units will be occupied by lowand moderate-income persons, or if the

property is a ‘‘qualified low-income

building’’ as defined in section 42(c)(2)

of the Internal Revenue Code (26 U.S.C.

42(c)(2));

(B) Investing in, developing,

rehabilitating, managing, selling, or

renting nonresidential real property or

other assets located in a low- or

moderate-income area and targeted

towards low- and moderate-income

persons;

(C) Investing in one or more small

businesses located in a low- or

moderate-income area to stimulate

economic development;

(D) Investing in, developing, or

otherwise assisting job training or

placement facilities or programs that

will be targeted towards low- and

moderate-income persons;

(E) Investing in an entity located in a

low- or moderate-income area if the

entity creates long-term employment

opportunities, a majority of which

(based on full-time equivalent positions)

will be held by low- and moderateincome persons; and

(F) Providing technical assistance,

credit counseling, research, and

program development assistance to lowand moderate-income persons, small

businesses, or nonprofit corporations to

help achieve community development;

(2) The investment is permitted by

state law;

(3) The investment will not expose

the member bank to liability beyond the

amount of the investment;

(4) The aggregate of all such

investments of the member bank does

not exceed the sum of five percent of its

capital stock and surplus;

(5) The member bank is well

capitalized or adequately capitalized

under §§ 208.43(b) (1) and (2);

(6) The member bank received a

composite CAMELS rating of ‘‘1’’ or ‘‘2’’

under the Uniform Financial

Institutions Rating System as of its most

recent examination and an overall rating

of ‘‘1’’ or ‘‘2’’ as of its most recent

consumer compliance examination; and

(7) The member bank is not subject to

any written agreement, cease-and-desist

order, capital directive, promptcorrective-action directive, or

memorandum of understanding issued

by the Board or a Federal Reserve Bank.

(c) Notice to Federal Reserve Bank.

Not more than 30 days after making an

investment under paragraph (b) of this

section, the member bank shall advise

its Federal Reserve Bank of the

investment, including the amount of the

investment and the identity of the entity

in which the investment is made.

(d) Investments requiring Board

approval. (1) With prior Board approval,

a member bank may make public

welfare investments under paragraph 23

of section 9 of the Federal Reserve Act

(12 U.S.C. 338a), other than those

specified in paragraph (b) of this

section.

(2) Requests for Board approval under

this paragraph (d) shall include, at a

minimum:

(i) The amount of the proposed

investment;

(ii) A description of the entity in

which the investment is to be made;

(iii) An explanation of why the

investment is a public welfare

investment under paragraph 23 of

section 9 of the Federal Reserve Act (12

U.S.C. 338a);
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37643

6A standby letter of credit does not include: (1)

Commercial letters of credit and similar

instruments, where the issuing bank expects the

beneficiary to draw upon the issuer, and which do

not guaranty payment of a money obligation; or (2)

a guaranty or similar obligation issued by a foreign

branch in accordance with and subject to the

limitations of 12 CFR part 211 (Regulation K).

(iv) A description of the member

bank’s potential liability under the

proposed investment;

(v) The amount of the member bank’s

aggregate outstanding public welfare

investments under paragraph 23 of

section 9 of the Federal Reserve Act;

(vi) The amount of the member bank’s

capital stock and surplus; and

(vii) If the bank investment is not

eligible under paragraph (b) of this

section, explain the reason or reasons

why it is ineligible.

(3) The Board shall act on a request

under this paragraph (d) within 60

calendar days of receipt of a request that

meets the requirements of paragraph

(d)(2) of this section, unless the Board

notifies the requesting member bank

that a longer time period will be

required.

(e) Divestiture of investments. A

member bank shall divest itself of an

investment made under paragraph (b) or

(d) of this section to the extent that the

investment exceeds the scope of, or

ceases to meet, the requirements of

paragraphs (b)(1) through (b)(4) or

paragraph (d) of this section. The

divestiture shall be made in the manner

specified in 12 CFR 225.140, Regulation

Y, for interests acquired by a lending

subsidiary of a bank holding company

or the bank holding company itself in

satisfaction of a debt previously

contracted.

§ 208.23 Agricultural loan loss

amortization.

(a) Definitions. For purposes of this

section:

(1) Accepting official means:

(i) The Reserve Bank in whose district

the bank is located; or

(ii) The Director of the Division of

Banking Supervision and Regulation in

cases in which the Reserve Bank cannot

determine that the bank qualifies.

(2) Agriculturally related other

property means any property, real or

personal, that the bank owned on

January 1, 1983, and any additional

property that it acquired prior to

January 1, 1992, in connection with a

qualified agricultural loan. For the

purposes of paragraph (d) of this

section, the value of such property shall

include the amount previously charged

off as a loss.

(3) Participating bank means an

agricultural bank (as defined in 12

U.S.C. 1823(j)(4)(A)) that, as of January

1, 1992, had a proposal for a capital

restoration plan accepted by an

accepting official and received

permission from the accepting official,

subject to paragraphs (d) and (e) of this

section, to amortize losses in accordance

with paragraphs (b) and (c) of this

section.

(4) Qualified agricultural loan means:

(i) Loans that finance agricultural

production or are secured by farm land

for purposes of Schedule RC–C of the

FFIEC Consolidated Report of Condition

or such other comparable schedule;

(ii) Loans secured by farm machinery;

(iii) Other loans that a bank proves to

be sufficiently related to agriculture for

classification as an agricultural loan by

the Board; and

(iv) The remaining unpaid balance of

any loans described in paragraphs (a)(4)

(i), (ii) and (iii) of this section that have

been charged off since January 1, 1984,

and that qualify for deferral under this

section.

(b)(1) Provided there is no evidence

that the loss resulted from fraud or

criminal abuse on the part of the bank,

the officers, directors, or principal

shareholders, a participating bank may

amortize in its Reports of Condition and

Income:

(i) Any loss on a qualified agricultural

loan that the bank would be required to

reflect in its financial statements for any

period between and including 1984 and

1991; or

(ii) Any loss that the bank would be

required to reflect in its financial

statements for any period between and

including 1983 and 1991 resulting from

a reappraisal or sale of agriculturallyrelated other property.

(2) Amortization under this section

shall be computed over a period not to

exceed seven years on a quarterly

straight-line basis commencing in the

first quarter after the loan was or is

charged off so as to be fully amortized

not later than December 31, 1998.

(c) Accounting for amortization. Any

bank that is permitted to amortize losses

in accordance with paragraph (b) of this

section may restate its capital and other

relevant accounts and account for future

authorized deferrals and authorizations

in accordance with the instructions to

the FFIEC Consolidated Reports of

Condition and Income. Any resulting

increase in the capital account shall be

included in qualifying capital pursuant

to appendix A of this part.

(d) Conditions of participation. In

order for a bank to maintain its status

as a participating bank, it shall:

(1) Adhere to the approved capital

plan and obtain the prior approval of

the accepting official before making any

modifications to the plan;

(2) Maintain accounting records for

each asset subject to loss deferral under

the program that document the amount

and timing of the deferrals, repayments,

and authorizations;

(3) Maintain the financial condition of

the bank so that it does not deteriorate

to the point where it is no longer a

viable, fundamentally sound institution;

(4) Make a reasonable effort,

consistent with safe and sound banking

practices, to maintain in its loan

portfolio a percentage of agricultural

loans, including agriculturally-related

other property, not less than the

percentage of such loans in its loan

portfolio on January 1, 1986; and

(5) Provide the accepting official,

upon request, with any information the

accepting official deems necessary to

monitor the bank’s amortization, its

compliance with the conditions of

participation, and its continued

eligibility.

(e) Revocation of eligibility for loss

amortization. The failure to comply

with any condition in an acceptance,

with the capital restoration plan, or with

the conditions stated in paragraph (d) of

this section, is grounds for revocation of

acceptance for loss amortization and for

an administrative action against the

bank under 12 U.S.C. 1818(b). In

addition, acceptance of a bank for loss

amortization shall not foreclose any

administrative action against the bank

that the Board may deem appropriate.

(f) Expiration date. The terms of this

section will no longer be in effect as of

January 1, 1999.

§ 208.24 Letters of credit and acceptances.

(a) Standby letters of credit. For the

purpose of this section, standby letters

of credit include every letter of credit

(or similar arrangement however named

or designated) that represents an

obligation to the beneficiary on the part

of the issuer:

(1) To repay money borrowed by or

advanced to or for the account of the

account party; or

(2) To make payment on account of

any evidence of indebtedness

undertaken by the account party; or

(3) To make payment on account of

any default by the party procuring the

issuance of the letter of credit in the

performance of an obligation.6

(b) Ineligible acceptance. An

ineligible acceptance is a time draft

accepted by a bank, which does not

meet the requirements for discount with

a Federal Reserve Bank.

(c) Bank’s lending limits. Standby

letters of credit and ineligible
37644 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

acceptances count toward member

banks’ lending limits imposed by state

law.

(d) Exceptions. A standby letter of

credit or ineligible acceptance is not

subject to the restrictions set forth in

paragraph (c) of this section if prior to

or at the time of issuance of the credit:

(1) The issuing bank is paid an

amount equal to the bank’s maximum

liability under the standby letter of

credit; or

(2) The party procuring the issuance

of a letter of credit or ineligible

acceptance has set aside sufficient funds

in a segregated, clearly earmarked

deposit account to cover the bank’s

maximum liability under the standby

letter of credit or ineligible acceptance.

§ 208.25 Loans in areas having special

flood hazards.

(a) Purpose and scope. (1) Purpose.

The purpose of this section is to

implement the requirements of the

National Flood Insurance Act of 1968

and the Flood Disaster Protection Act of

1973, as amended (42 U.S.C. 4001–

4129).

(2) Scope. This section, except for

paragraphs (f) and (h) of this section,

applies to loans secured by buildings or

mobile homes located or to be located

in areas determined by the Director of

the Federal Emergency Management

Agency to have special flood hazards.

Paragraphs (f) and (h) of this section

apply to loans secured by buildings or

mobile homes, regardless of location.

(b) Definitions. For purposes of this

section:

(1) Act means the National Flood

Insurance Act of 1968, as amended (42

U.S.C. 4001–4129).

(2) Building means a walled and

roofed structure, other than a gas or

liquid storage tank, that is principally

above ground and affixed to a

permanent site, and a walled and roofed

structure while in the course of

construction, alteration, or repair.

(3) Community means a State or a

political subdivision of a State that has

zoning and building code jurisdiction

over a particular area having special

flood hazards.

(4) Designated loan means a loan

secured by a building or mobile home

that is located or to be located in a

special flood hazard area in which flood

insurance is available under the Act.

(5) Director of FEMA means the

Director of the Federal Emergency

Management Agency.

(6) Mobile home means a structure,

transportable in one or more sections,

that is built on a permanent chassis and

designed for use with or without a

permanent foundation when attached to

the required utilities. The term mobile

home does not include a recreational

vehicle. For purposes of this section, the

term mobile home means a mobile home

on a permanent foundation. The term

mobile home includes a manufactured

home as that term is used in the

National Flood Insurance Program.

(7) NFIP means the National Flood

Insurance Program authorized under the

Act.

(8) Residential improved real estate

means real estate upon which a home or

other residential building is located or

to be located.

(9) Servicer means the person

responsible for:

(i) Receiving any scheduled, periodic

payments from a borrower under the

terms of a loan, including amounts for

taxes, insurance premiums, and other

charges with respect to the property

securing the loan; and

(ii) Making payments of principal and

interest and any other payments from

the amounts received from the borrower

as may be required under the terms of

the loan.

(10) Special flood hazard area means

the land in the flood plain within a

community having at least a one percent

chance of flooding in any given year, as

designated by the Director of FEMA.

(11) Table funding means a settlement

at which a loan is funded by a

contemporaneous advance of loan funds

and an assignment of the loan to the

person advancing the funds.

(c) Requirement to purchase flood

insurance where available. (1) In

general. A member bank shall not make,

increase, extend, or renew any

designated loan unless the building or

mobile home and any personal property

securing the loan is covered by flood

insurance for the term of the loan. The

amount of insurance must be at least

equal to the lesser of the outstanding

principal balance of the designated loan

or the maximum limit of coverage

available for the particular type of

property under the Act. Flood insurance

coverage under the Act is limited to the

overall value of the property securing

the designated loan minus the value of

the land on which the property is

located.

(2) Table funded loans. A member

bank that acquires a loan from a

mortgage broker or other entity through

table funding shall be considered to be

making a loan for the purposes of this

section.

(d) Exemptions. The flood insurance

requirement prescribed by paragraph (c)

of this section does not apply with

respect to:

(1) Any State-owned property covered

under a policy of self-insurance

satisfactory to the Director of FEMA,

who publishes and periodically revises

the list of States falling within this

exemption; or

(2) Property securing any loan with an

original principal balance of $5,000 or

less and a repayment term of one year

or less.

(e) Escrow requirement. If a member

bank requires the escrow of taxes,

insurance premiums, fees, or any other

charges for a loan secured by residential

improved real estate or a mobile home

that is made, increased, extended, or

renewed after October 1, 1996, the

member bank shall also require the

escrow of all premiums and fees for any

flood insurance required under

paragraph (c) of this section. The

member bank, or a servicer acting on its

behalf, shall deposit the flood insurance

premiums on behalf of the borrower in

an escrow account. This escrow account

will be subject to escrow requirements

adopted pursuant to section 10 of the

Real Estate Settlement Procedures Act of

1974 (12 U.S.C. 2609) (RESPA), which

generally limits the amount that may be

maintained in escrow accounts for

certain types of loans and requires

escrow account statements for those

accounts, only if the loan is otherwise

subject to RESPA. Following receipt of

a notice from the Director of FEMA or

other provider of flood insurance that

premiums are due, the member bank, or

a servicer acting on its behalf, shall pay

the amount owed to the insurance

provider from the escrow account by the

date when such premiums are due.

(f) Required use of standard flood

hazard determination form. (1) Use of

form. A member bank shall use the

standard flood hazard determination

form developed by the Director of

FEMA (as set forth in appendix A of 44

CFR part 65) when determining whether

the building or mobile home offered as

collateral security for a loan is or will

be located in a special flood hazard area

in which flood insurance is available

under the Act. The standard flood

hazard determination form may be used

in a printed, computerized, or electronic

manner.

(2) Retention of form. A member bank

shall retain a copy of the completed

standard flood hazard determination

form, in either hard copy or electronic

form, for the period of time the bank

owns the loan.

(g) Forced placement of flood

insurance. If a member bank, or a

servicer acting on behalf of the bank,

determines at any time during the term

of a designated loan that the building or

mobile home and any personal property

securing the designated loan is not

covered by flood insurance or is covered
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37645

by flood insurance in an amount less

than the amount required under

paragraph (c) of this section, then the

bank or its servicer shall notify the

borrower that the borrower should

obtain flood insurance, at the borrower’s

expense, in an amount at least equal to

the amount required under paragraph

(c) of this section, for the remaining

term of the loan. If the borrower fails to

obtain flood insurance within 45 days

after notification, then the member bank

or its servicer shall purchase insurance

on the borrower’s behalf. The member

bank or its servicer may charge the

borrower for the cost of premiums and

fees incurred in purchasing the

insurance.

(h) Determination fees. (1) General.

Notwithstanding any Federal or State

law other than the Flood Disaster

Protection Act of 1973, as amended (42

U.S.C. 4001–4129), any member bank,

or a servicer acting on behalf of the

bank, may charge a reasonable fee for

determining whether the building or

mobile home securing the loan is

located or will be located in a special

flood hazard area. A determination fee

may also include, but is not limited to,

a fee for life-of-loan monitoring.

(2) Borrower fee. The determination

fee authorized by paragraph (h)(1) of

this section may be charged to the

borrower if the determination:

(i) Is made in connection with a

making, increasing, extending, or

renewing of the loan that is initiated by

the borrower;

(ii) Reflects the Director of FEMA’s

revision or updating of flood plain areas

or flood-risk zones;

(iii) Reflects the Director of FEMA’s

publication of a notice or compendium

that:

(A) Affects the area in which the

building or mobile home securing the

loan is located; or

(B) By determination of the Director of

FEMA, may reasonably require a

determination whether the building or

mobile home securing the loan is

located in a special flood hazard area;

(iv) Results in the purchase of flood

insurance coverage by the lender or its

servicer on behalf of the borrower under

paragraph (g) of this section.

(3) Purchaser or transferee fee. The

determination fee authorized by

paragraph (h)(1) of this section may be

charged to the purchaser or transferee of

a loan in the case of the sale or transfer

of the loan.

(i) Notice of special flood hazards and

availability of Federal disaster relief

assistance. When a member bank

makes, increases, extends, or renews a

loan secured by a building or a mobile

home located or to be located in a

special flood hazard area, the bank shall

mail or deliver a written notice to the

borrower and to the servicer in all cases

whether or not flood insurance is

available under the Act for the collateral

securing the loan.

(1) Contents of notice. The written

notice must include the following

information:

(i) A warning, in a form approved by

the Director of FEMA, that the building

or the mobile home is or will be located

in a special flood hazard area;

(ii) A description of the flood

insurance purchase requirements set

forth in section 102(b) of the Flood

Disaster Protection Act of 1973, as

amended (42 U.S.C. 4012a(b));

(iii) A statement, where applicable,

that flood insurance coverage is

available under the NFIP and may also

be available from private insurers; and

(iv) A statement whether Federal

disaster relief assistance may be

available in the event of damage to the

building or mobile home caused by

flooding in a Federally declared

disaster.

(2) Timing of notice. The member

bank shall provide the notice required

by paragraph (i)(1) of this section to the

borrower within a reasonable time

before the completion of the transaction,

and to the servicer as promptly as

practicable after the bank provides

notice to the borrower and in any event

no later than the time the bank provides

other similar notices to the servicer

concerning hazard insurance and taxes.

Notice to the servicer may be made

electronically or may take the form of a

copy of the notice to the borrower.

(3) Record of receipt. The member

bank shall retain a record of the receipt

of the notices by the borrower and the

servicer for the period of time the bank

owns the loan.

(4) Alternate method of notice.

Instead of providing the notice to the

borrower required by paragraph (i)(1) of

this section, a member bank may obtain

satisfactory written assurance from a

seller or lessor that, within a reasonable

time before the completion of the sale or

lease transaction, the seller or lessor has

provided such notice to the purchaser or

lessee. The member bank shall retain a

record of the written assurance from the

seller or lessor for the period of time the

bank owns the loan.

(5) Use of prescribed form of notice.

A member bank will be considered to be

in compliance with the requirement for

notice to the borrower of this paragraph

(i) by providing written notice to the

borrower containing the language

presented in appendix A of this section

within a reasonable time before the

completion of the transaction. The

notice presented in appendix A of this

section satisfies the borrower notice

requirements of the Act.

(j) Notice of servicer’s identity. (1)

Notice requirement. When a member

bank makes, increases, extends, renews,

sells, or transfers a loan secured by a

building or mobile home located or to

be located in a special flood hazard area,

the bank shall notify the Director of

FEMA (or the Director’s designee) in

writing of the identity of the servicer of

the loan. The Director of FEMA has

designated the insurance provider to

receive the member bank’s notice of the

servicer’s identity. This notice may be

provided electronically if electronic

transmission is satisfactory to the

Director of FEMA’s designee.

(2) Transfer of servicing rights. The

member bank shall notify the Director of

FEMA (or the Director’s designee) of any

change in the servicer of a loan

described in paragraph (j)(1) of this

section within 60 days after the effective

date of the change. This notice may be

provided electronically if electronic

transmission is satisfactory to the

Director of FEMA’s designee. Upon any

change in the servicing of a loan

described in paragraph (j)(1) of this

section, the duty to provide notice

under this paragraph (j)(2) shall transfer

to the transferee servicer.

Appendix A to § 208.25 Sample Form of

Notice

Notice of Special Flood Hazards and

Availability of Federal Disaster Relief

Assistance

We are giving you this notice to inform you

that:

The building or mobile home securing the

loan for which you have applied is or will

be located in an area with special flood

hazards.

The area has been identified by the

Director of the Federal Emergency

Management Agency (FEMA) as a special

flood hazard area using FEMA’s Flood

Insurance Rate Map or the Flood Hazard

Boundary Map for the following community:

llllllllll. This area has a one

percent (1%) chance of a flood equal to or

exceeding the base flood elevation (a 100-

year flood) in any given year. During the life

of a 30-year mortgage loan, the risk of a 100-

year flood in a special flood hazard area is

26 percent (26%).

Federal law allows a lender and borrower

jointly to request the Director of FEMA to

review the determination of whether the

property securing the loan is located in a

special flood hazard area. If you would like

to make such a request, please contact us for

further information.

lll The community in which the

property securing the loan is located

participates in the National Flood Insurance

Program (NFIP). Federal law will not allow

us to make you the loan that you have

applied for if you do not purchase flood
37646 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

insurance. The flood insurance must be

maintained for the life of the loan. If you fail

to purchase or renew flood insurance on the

property, Federal law authorizes and requires

us to purchase the flood insurance for you at

your expense.

• Flood insurance coverage under the

NFIP may be purchased through an insurance

agent who will obtain the policy either

directly through the NFIP or through an

insurance company that participates in the

NFIP. Flood insurance also may be available

from private insurers that do not participate

in the NFIP.

• At a minimum, flood insurance

purchased must cover the lesser of:

(1) the outstanding principal balance of the

loan; or

(2) the maximum amount of coverage

allowed for the type of property under the

NFIP.

Flood insurance coverage under the NFIP

is limited to the overall value of the property

securing the loan minus the value of the land

on which the property is located.

• Federal disaster relief assistance (usually

in the form of a low-interest loan) may be

available for damages incurred in excess of

your flood insurance if your community’s

participation in the NFIP is in accordance

with NFIP requirements.

lllFlood insurance coverage under the

NFIP is not available for the property

securing the loan because the community in

which the property is located does not

participate in the NFIP. In addition, if the

non-participating community has been

identified for at least one year as containing

a special flood hazard area, properties

located in the community will not be eligible

for Federal disaster relief assistance in the

event of a Federally declared flood disaster.

Subpart C—Bank Securities and

Securities-Related Activities

§ 208.30 Authority, purpose, and scope.

(a) Authority. Subpart C of Regulation

H (12 CFR part 208, subpart C) is issued

by the Board of Governors of the Federal

Reserve System under 12 U.S.C. 24, 92a,

93a; sections 1818 and 1831p–1(a)(2) of

the FDI Act (12 U.S.C. 1818, 1831p–

1(a)(2)); and sections 78b, 78l(b), 78l(g),

78l(i), 78o–4(c)(5), 78o–5, 78q, 78q–1,

and 78w of the Securities Exchange Act

of 1934 (15 U.S.C. 78b, 78l(b), 78l(g),

78l(i), 78o–4(c)(5), 78o–5, 78q, 78q–1,

78w).

(b) Purpose and scope. This subpart C

describes the requirements imposed

upon member banks acting as transfer

agents, registered clearing agencies, or

sellers of securities under the Securities

Exchange Act of 1934. This subpart C

also describes the reporting

requirements imposed on member banks

whose securities are subject to

registration under the Securities

Exchange Act of 1934.

§ 208.31 State member banks as transfer

agents.

(a) The rules adopted by the

Securities and Exchange Commission

(SEC) pursuant to section 17A of the

Securities Exchange Act of 1934 (15

U.S.C. 78q–l) prescribing procedures for

registration of transfer agents for which

the SEC is the appropriate regulatory

agency (17 CFR 240.17Ac2–1) apply to

member bank transfer agents. References

to the ‘‘Commission’’ are deemed to

refer to the Board.

(b) The rules adopted by the SEC

pursuant to section 17A prescribing

operational and reporting requirements

for transfer agents (17 CFR 240.17Ac2–

2 and 240.17Ad–1 through 240.17Ad–

16) apply to member bank transfer

agents.

§ 208.32 Notice of disciplinary sanctions

imposed by registered clearing agency.

(a) Notice requirement. Any member

bank or any of its subsidiaries that is a

registered clearing agency pursuant to

section 17A(b) of the Securities

Exchange Act of 1934 (the Act), and

that:

(1) Imposes any final disciplinary

sanction on any participant therein;

(2) Denies participation to any

applicant; or

(3) Prohibits or limits any person in

respect to access to services offered by

the clearing agency, shall file with the

Board (and the appropriate regulatory

agency, if other than the Board, for a

participant or applicant) notice thereof

in the manner prescribed in this section.

(b) Notice of final disciplinary

actions. (1) Any registered clearing

agency for which the Board is the

appropriate regulatory agency that takes

any final disciplinary action with

respect to any participant shall

promptly file a notice thereof with the

Board in accordance with paragraph (c)

of this section. For the purposes of this

paragraph (b), final disciplinary action

means the imposition of any

disciplinary sanction pursuant to

section 17A(b)(3)(G) of the Act, or other

action of a registered clearing agency

which, after notice and opportunity for

hearing, results in final disposition of

charges of:

(i) One or more violations of the rules

of the registered clearing agency; or

(ii) Acts or practices constituting a

statutory disqualification of a type

defined in paragraph (iv) or (v) (except

prior convictions) of section 3(a)(39) of

the Act.

(2) However, if a registered clearing

agency fee schedule specifies certain

charges for errors made by its

participants in giving instructions to the

registered clearing agency which are de

minimis on a per error basis, and whose

purpose is, in part, to provide revenues

to the clearing agency to compensate it

for effort expended in beginning to

process an erroneous instruction, such

error charges shall not be considered a

final disciplinary action for purposes of

this paragraph (b).

(c) Contents of final disciplinary

action notice. Any notice filed pursuant

to paragraph (b) of this section shall

consist of the following, as appropriate:

(1) The name of the respondent and

the respondent’s last known address, as

reflected on the records of the clearing

agency, and the name of the person,

committee, or other organizational unit

that brought the charges. However,

identifying information as to any

respondent found not to have violated a

provision covered by a charge may be

deleted insofar as the notice reports the

disposition of that charge and, prior to

the filing of the notice, the respondent

does not request that identifying

information be included in the notice;

(2) A statement describing the

investigative or other origin of the

action;

(3) As charged in the proceeding, the

specific provision or provisions of the

rules of the clearing agency violated by

the respondent, or the statutory

disqualification referred to in paragraph

(b)(2) of this section, and a statement

describing the answer of the respondent

to the charges;

(4) A statement setting forth findings

of fact with respect to any act or practice

in which the respondent was charged

with having engaged in or omitted; the

conclusion of the clearing agency as to

whether the respondent violated any

rule or was subject to a statutory

disqualification as charged; and a

statement of the clearing agency in

support of its resolution of the principal

issues raised in the proceedings;

(5) A statement describing any

sanction imposed, the reasons therefor,

and the date upon which the sanction

became or will become effective; and

(6) Such other matters as the clearing

agency may deem relevant.

(d) Notice of final denial, prohibition,

termination or limitation based on

qualification or administrative rules. (1)

Any registered clearing agency, for

which the Board is the appropriate

regulatory agency, that takes any final

action that denies or conditions the

participation of any person, or prohibits

or limits access, to services offered by

the clearing agency, shall promptly file

notice thereof with the Board (and the

appropriate regulatory agency, if other

than the Board, for the affected person)

in accordance with paragraph (e) of this

section; but such action shall not be
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37647

considered a final disciplinary action

for purposes of paragraph (b) of this

section where the action is based on an

alleged failure of such person to:

(i) Comply with the qualification

standards prescribed by the rules of the

registered clearing agency pursuant to

section 17A(b)(4)(B) of the Act; or

(ii) Comply with any administrative

requirements of the registered clearing

agency (including failure to pay entry or

other dues or fees, or to file prescribed

forms or reports) not involving charges

of violations that may lead to a

disciplinary sanction.

(2) However, no such action shall be

considered final pursuant to this

paragraph (d) that results merely from a

notice of such failure to comply to the

person affected, if such person has not

sought an adjudication of the matter,

including a hearing, or otherwise

exhausted the administrative remedies

within the registered clearing agency

with respect to such a matter.

(e) Contents of notice required by

paragraph (d) of this section. Any notice

filed pursuant to paragraph (d) of this

section shall consist of the following, as

appropriate:

(1) The name of each person

concerned and each person’s last known

address, as reflected in the records of

the clearing agency;

(2) The specific grounds upon which

the action of the clearing agency was

based, and a statement describing the

answer of the person concerned;

(3) A statement setting forth findings

of fact and conclusions as to each

alleged failure of the person to comply

with qualification standards or

administrative obligations, and a

statement of the clearing agency in

support of its resolution of the principal

issues raised in the proceeding;

(4) The date upon which such action

became or will become effective; and

(5) Such other matters as the clearing

agency deems relevant.

(f) Notice of final action based on

prior adjudicated statutory

disqualifications. Any registered

clearing agency for which the Board is

the appropriate regulatory agency that

takes any final action shall promptly file

notice thereof with the Board (and the

appropriate regulatory agency, if other

than the Board, for the affected person)

in accordance with paragraph (g) of this

section, where the final action:

(1) Denies or conditions participation

to any person, or prohibits or limits

access to services offered by the clearing

agency; and

(2) Is based upon a statutory

disqualification of a type defined in

paragraph (A), (B) or (C) of section

3(a)(39) of the Act, consisting of a prior

conviction, as described in

subparagraph (E) of section 3(a)(39) of

the Act. However, no such action shall

be considered final pursuant to this

paragraph (f) that results merely from a

notice of such disqualification to the

person affected, if such person has not

sought an adjudication of the matter,

including a hearing, or otherwise

exhausted the administrative remedies

within the clearing agency with respect

to such a matter.

(g) Contents of notice required by

paragraph (f) of this section. Any notice

filed pursuant to paragraph (f) of this

section shall consist of the following, as

appropriate:

(1) The name of each person

concerned and each person’s last known

address, as reflected in the records of

the clearing agency;

(2) A statement setting forth the

principal issues raised, the answer of

any person concerned, and a statement

of the clearing agency in support of its

resolution of the principal issues raised

in the proceeding;

(3) Any description furnished by or

on behalf of the person concerned of the

activities engaged in by the person since

the adjudication upon which the

disqualification is based;

(4) A copy of the order or decision of

the court, appropriate regulatory agency,

or self-regulatory organization that

adjudicated the matter giving rise to the

statutory disqualification;

(5) The nature of the action taken and

the date upon which such action is to

be made effective; and

(6) Such other matters as the clearing

agency deems relevant.

(h) Notice of summary suspension of

participation. Any registered clearing

agency for which the Board is the

appropriate regulatory agency that

summarily suspends or closes the

accounts of a participant pursuant to the

provisions of section 17A(b)(5)(C) of the

Act shall, within one business day after

such action becomes effective, file

notice thereof with the Board and the

appropriate regulatory agency for the

participant, if other than the Board, of

such action in accordance with

paragraph (i) of this section.

(i) Contents of notice of summary

suspension. Any notice pursuant to

paragraph (h) of this section shall

contain at least the following

information, as appropriate:

(1) The name of the participant

concerned and the participant’s last

known address, as reflected in the

records of the clearing agency;

(2) The date upon which the summary

action became or will become effective;

(3) If the summary action is based

upon the provisions of section

17A(b)(5)(C)(i) of the Act, a copy of the

relevant order or decision of the selfregulatory organization, if available to

the clearing agency;

(4) If the summary action is based

upon the provisions of section

17A(b)(5)(C)(ii) of the Act, a statement

describing the default of any delivery of

funds or securities to the clearing

agency;

(5) If the summary action is based

upon the provisions of section

17A(b)(5)(C)(iii) of the Act, a statement

describing the financial or operating

difficulty of the participant based upon

which the clearing agency determined

that the suspension and closing of

accounts was necessary for the

protection of the clearing agency, its

participants, creditors, or investors;

(6) The nature and effective date of

the suspension; and

(7) Such other matters as the clearing

agency deems relevant.

§ 208.33 Application for stay or review of

disciplinary sanctions imposed by

registered clearing agency.

(a) Stays. The rules adopted by the

Securities and Exchange Commission

(SEC) pursuant to section 19 of the

Securities Exchange Act of 1934 (15

U.S.C. 78s) regarding applications by

persons for whom the SEC is the

appropriate regulatory agency for stays

of disciplinary sanctions or summary

suspensions imposed by registered

clearing agencies (17 CFR 240.19d–2)

apply to applications by member banks.

References to the ‘‘Commission’’ are

deemed to refer to the Board.

(b) Reviews. The regulations adopted

by the Securities and Exchange

Commission pursuant to section 19 of

the Securities and Exchange Act of 1934

(15 U.S.C. 78s) regarding applications

by persons for whom the SEC is the

appropriate regulatory agency for

reviews of final disciplinary sanctions,

denials of participation, or prohibitions

or limitations of access to services

imposed by registered clearing agencies

(17 CFR 240.19d–3(a)–(f)) apply to

applications by member banks.

References to the ‘‘Commission’’ are

deemed to refer to the Board. The

Board’s Uniform Rules of Practice and

Procedure (12 CFR part 263) apply to

review proceedings under this § 208.33

to the extent not inconsistent with this

§ 208.33.

§ 208.34 Recordkeeping and confirmation

of certain securities transactions effected

by State member banks.

(a) Exceptions and safe and sound

operations. (1) A State member bank

may be excepted from one or more of

the requirements of this section if it
37648 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

meets one of the following conditions of

paragraphs (a)(1)(i) through (a)(1)(iv) of

this section:

(i) De minimis transactions. The

requirements of paragraphs (c)(2)

through (c)(4) and paragraphs (e)(1)

through (e)(3) of this section shall not

apply to banks having an average of less

than 200 securities transactions per year

for customers over the prior three

calendar year period, exclusive of

transactions in government securities;

(ii) Government securities. The

recordkeeping requirements of

paragraph (c) of this section shall not

apply to banks effecting fewer than 500

government securities brokerage

transactions per year; provided that this

exception shall not apply to government

securities transactions by a State

member bank that has filed a written

notice, or is required to file notice, with

the Federal Reserve Board that it acts as

a government securities broker or a

government securities dealer;

(iii) Municipal securities. The

municipal securities activities of a State

member bank that are subject to

regulations promulgated by the

Municipal Securities Rulemaking Board

shall not be subject to the requirements

of this section; and

(iv) Foreign branches. The

requirements of this section shall not

apply to the activities of foreign

branches of a State member bank.

(2) Every State member bank

qualifying for an exemption under

paragraph (a)(1) of this section that

conducts securities transactions for

customers shall, to ensure safe and

sound operations, maintain effective

systems of records and controls

regarding its customer securities

transactions that clearly and accurately

reflect appropriate information and

provide an adequate basis for an audit

of the information.

(b) Definitions. For purposes of this

section:

(1) Asset-backed security shall mean a

security that is serviced primarily by the

cash flows of a discrete pool of

receivables or other financial assets,

either fixed or revolving, that by their

terms convert into cash within a finite

time period plus any rights or other

assets designed to assure the servicing

or timely distribution of proceeds to the

security holders.

(2) Collective investment fund shall

mean funds held by a State member

bank as fiduciary and, consistent with

local law, invested collectively as

follows:

(i) In a common trust fund maintained

by such bank exclusively for the

collective investment and reinvestment

of monies contributed thereto by the

bank in its capacity as trustee, executor,

administrator, guardian, or custodian

under the Uniform Gifts to Minors Act;

or

(ii) In a fund consisting solely of

assets of retirement, pension, profit

sharing, stock bonus or similar trusts

which are exempt from Federal income

taxation under the Internal Revenue

Code (26 U.S.C.).

(3) Completion of the transaction

effected by or through a state member

bank shall mean:

(i) For purchase transactions, the time

when the customer pays the bank any

part of the purchase price (or the time

when the bank makes the book-entry for

any part of the purchase price if

applicable); however, if the customer

pays for the security prior to the time

payment is requested or becomes due,

then the transaction shall be completed

when the bank transfers the security

into the account of the customer; and

(ii) For sale transactions, the time

when the bank transfers the security out

of the account of the customer or, if the

security is not in the bank’s custody,

then the time when the security is

delivered to the bank; however, if the

customer delivers the security to the

bank prior to the time delivery is

requested or becomes due then the

transaction shall be completed when the

banks makes payment into the account

of the customer.

(4) Crossing of buy and sell orders

shall mean a security transaction in

which the same bank acts as agent for

both the buyer and the seller.

(5) Customer shall mean any person

or account, including any agency, trust,

estate, guardianship, or other fiduciary

account, for which a State member bank

effects or participates in effecting the

purchase or sale of securities, but shall

not include a broker, dealer, bank acting

as a broker or dealer, municipal

securities broker or dealer, or issuer of

the securities which are the subject of

the transactions.

(6) Debt security as used in paragraph

(c) of this section shall mean any

security, such as a bond, debenture,

note or any other similar instrument

which evidences a liability of the issuer

(including any security of this type that

is convertible into stock or similar

security) and fractional or participation

interests in one or more of any of the

foregoing; provided, however, that

securities issued by an investment

company registered under the

Investment Company Act of 1940, 15

U.S.C. 80a–1 et seq., shall not be

included in this definition.

(7) Government security shall mean:

(i) A security that is a direct

obligation of, or obligation guaranteed

as to principal and interest by, the

United States;

(ii) A security that is issued or

guaranteed by a corporation in which

the United States has a direct or indirect

interest and which is designated by the

Secretary of the Treasury for exemption

as necessary or appropriate in the public

interest or for the protection of

investors;

(iii) A security issued or guaranteed as

to principal and interest by any

corporation whose securities are

designated, by statute specifically

naming the corporation, to constitute

exempt securities within the meaning of

the laws administered by the Securities

and Exchange Commission; or

(iv) Any put, call, straddle, option, or

privilege on a security as described in

paragraphs (b)(7) (i), (ii), or (iii) of this

section other than a put, call, straddle,

option, or privilege that is traded on one

or more national securities exchanges,

or for which quotations are

disseminated though an automated

quotation system operated by a

registered securities association.

(8) Investment discretion with respect

to an account shall mean if the State

member bank, directly or indirectly, is

authorized to determine what securities

or other property shall be purchased or

sold by or for the account, or makes

decisions as to what securities or other

property shall be purchased or sold by

or for the account even though some

other person may have responsibility for

such investment decisions.

(9) Municipal security shall mean a

security which is a direct obligation of,

or obligation guaranteed as to principal

or interest by, a State or any political

subdivision thereof, or any agency or

instrumentality of a State or any

political subdivision thereof, or any

municipal corporate instrumentality of

one or more States, or any security

which is an industrial development

bond (as defined in 26 U.S.C. 103(c)(2)

the interest on which is excludable from

gross income under 26 U.S.C. 103(a)(1),

by reason of the application of

paragraph (4) or (6) of 26 U.S.C. 103(c)

(determined as if paragraphs (4)(A), (5)

and (7) were not included in 26 U.S.C.

103(c)), paragraph (1) of 26 U.S.C. 103(c)

does not apply to such security.

(10) Periodic plan shall mean:

(i) A written authorization for a State

member bank to act as agent to purchase

or sell for a customer a specific security

or securities, in a specific amount

(calculated in security units or dollars)

or to the extent of dividends and funds

available, at specific time intervals, and

setting forth the commission or charges

to be paid by the customer or the

manner of calculating them (including
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37649

dividend reinvestment plans, automatic

investment plans, and employee stock

purchase plans); or

(ii) Any prearranged, automatic

transfer or sweep of funds from a

deposit account to purchase a security,

or any prearranged, automatic

redemption or sale of a security with the

funds being transferred into a deposit

account (including cash management

sweep services).

(11) Security shall mean:

(i) Any note, stock, treasury stock,

bond, debenture, certificate of interest

or participation in any profit-sharing

agreement or in any oil, gas, or other

mineral royalty or lease, any collateraltrust certificate, preorganization

certificate or subscription, transferable

share, investment contract, voting-trust

certificate, for a security, any put, call,

straddle, option, or privilege on any

security, or group or index of securities

(including any interest therein or based

on the value thereof), any instrument

commonly known as a ‘‘security’’; or

any certificate of interest or

participation in, temporary or interim

certificate for, receipt for, or warrant or

right to subscribe to or purchase, any of

the foregoing.

(ii) But does not include a deposit or

share account in a federally or state

insured depository institution, a loan

participation, a letter of credit or other

form of bank indebtedness incurred in

the ordinary course of business,

currency, any note, draft, bill of

exchange, or bankers acceptance which

has a maturity at the time of issuance of

not exceeding nine months, exclusive of

days of grace, or any renewal thereof the

maturity of which is likewise limited,

units of a collective investment fund,

interests in a variable amount (master)

note of a borrower of prime credit, or

U.S. Savings Bonds.

(c) Recordkeeping. Except as provided

in paragraph (a) of this section, every

State member bank effecting securities

transactions for customers, including

transactions in government securities,

and municipal securities transactions by

banks not subject to registration as

municipal securities dealers, shall

maintain the following records with

respect to such transactions for at least

three years. Nothing contained in this

section shall require a bank to maintain

the records required by this paragraph

in any given manner, provided that the

information required to be shown is

clearly and accurately reflected and

provides an adequate basis for the audit

of such information. Records may be

maintained in hard copy, automated, or

electronic form provided the records are

easily retrievable, readily available for

inspection, and capable of being

reproduced in a hard copy. A bank may

contract with third party service

providers, including broker/dealers, to

maintain records required under this

part.

(1) Chronological records of original

entry containing an itemized daily

record of all purchases and sales of

securities. The records of original entry

shall show the account or customer for

which each such transaction was

effected, the description of the

securities, the unit and aggregate

purchase or sale price (if any), the trade

date and the name or other designation

of the broker/dealer or other person

from whom purchased or to whom sold;

(2) Account records for each customer

which shall reflect all purchases and

sales of securities, all receipts and

deliveries of securities, and all receipts

and disbursements of cash with respect

to transactions in securities for such

account and all other debits and credits

pertaining to transactions in securities;

(3) A separate memorandum (order

ticket) of each order to purchase or sell

securities (whether executed or

canceled), which shall include:

(i) The account(s) for which the

transaction was effected;

(ii) Whether the transaction was a

market order, limit order, or subject to

special instructions;

(iii) The time the order was received

by the trader or other bank employee

responsible for effecting the transaction;

(iv) The time the order was placed

with the broker/dealer, or if there was

no broker/dealer, the time the order was

executed or canceled;

(v) The price at which the order was

executed; and

(vi) The broker/dealer utilized;

(4) A record of all broker/dealers

selected by the bank to effect securities

transactions and the amount of

commissions paid or allocated to each

such broker during the calendar year;

and

(5) A copy of the written notification

required by paragraphs (d) and (e) of

this section.

(d) Content and time of notification.

Every State member bank effecting a

securities transaction for a customer

shall give or send to such customer

either of the following types of

notifications at or before completion of

the transaction or; if the bank uses a

broker/dealer’s confirmation, within one

business day from the bank’s receipt of

the broker/dealer’s confirmation:

(1) A copy of the confirmation of a

broker/dealer relating to the securities

transaction; and if the bank is to receive

remuneration from the customer or any

other source in connection with the

transaction, and the remuneration is not

determined pursuant to a prior written

agreement between the bank and the

customer, a statement of the source and

the amount of any remuneration to be

received; or

(2) A written notification disclosing:

(i) The name of the bank;

(ii) The name of the customer;

(iii) Whether the bank is acting as

agent for such customer, as agent for

both such customer and some other

person, as principal for its own account,

or in any other capacity;

(iv) The date of execution and a

statement that the time of execution will

be furnished within a reasonable time

upon written request of such customer

specifying the identity, price and

number of shares or units (or principal

amount in the case of debt securities) of

such security purchased or sold by such

customer;

(v) The amount of any remuneration

received or to be received, directly or

indirectly, by any broker/dealer from

such customer in connection with the

transaction;

(vi) The amount of any remuneration

received or to be received by the bank

from the customer and the source and

amount of any other remuneration to be

received by the bank in connection with

the transaction, unless remuneration is

determined pursuant to a written

agreement between the bank and the

customer, provided, however, in the

case of Government securities and

municipal securities, this paragraph

(d)(2)(vi) shall apply only with respect

to remuneration received by the bank in

an agency transaction. If the bank elects

not to disclose the source and amount

of remuneration it has or will receive

from a party other than the customer

pursuant to this paragraph (d)(2)(vi), the

written notification must disclose

whether the bank has received or will

receive remuneration from a party other

than the customer, and that the bank

will furnish within a reasonable time

the source and amount of this

remuneration upon written request of

the customer. This election is not

available, however, if, with respect to a

purchase, the bank was participating in

a distribution of that security; or with

respect to a sale, the bank was

participating in a tender offer for that

security;

(vii) The name of the broker/dealer

utilized; or, where there is no broker/

dealer, the name of the person from

whom the security was purchased or to

whom it was sold, or the fact that such

information will be furnished within a

reasonable time upon written request;

(viii) In the case of a transaction in a

debt security subject to redemption

before maturity, a statement to the effect
37650 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

that the debt security may be redeemed

in whole or in part before maturity, that

the redemption could affect the yield

represented and that additional

information is available on request;

(ix) In the case of a transaction in a

debt security effected exclusively on the

basis of a dollar price:

(A) The dollar price at which the

transaction was effected;

(B) The yield to maturity calculated

from the dollar price; provided,

however, that this paragraph

(c)(2)(ix)(B) shall not apply to a

transaction in a debt security that either

has a maturity date that may be

extended by the issuer with a variable

interest payable thereon, or is an assetbacked security that represents an

interest in or is secured by a pool of

receivables or other financial assets that

are subject to continuous prepayment;

(x) In the case of a transaction in a

debt security effected on the basis of

yield:

(A) The yield at which the transaction

was effected, including the percentage

amount and its characterization (e.g.,

current yield, yield to maturity, or yield

to call) and if effected at yield to call,

the type of call, the call date, and the

call price; and

(B) The dollar price calculated from

the yield at which the transaction was

effected; and

(C) If effected on a basis other than

yield to maturity and the yield to

maturity is lower than the represented

yield, the yield to maturity as well as

the represented yield; provided,

however, that this paragraph (c)(2)(x)(C)

shall not apply to a transaction in a debt

security that either has a maturity date

that may be extended by the issuer with

a variable interest rate payable thereon,

or is an asset-backed security that

represents an interest in or is secured by

a pool of receivables or other financial

assets that are subject to continuous

prepayment;

(xi) In the case of a transaction in a

debt security that is an asset-backed

security which represents an interest in

or is secured by a pool of receivables or

other financial assets that are subject

continuously to prepayment, a

statement indicating that the actual

yield of such asset-backed security may

vary according to the rate at which the

underlying receivables or other financial

assets are prepaid and a statement of the

fact that information concerning the

factors that affect yield (including at a

minimum, the estimated yield, weighted

average life, and the prepayment

assumptions underlying yield) will be

furnished upon written request of such

customer; and

(xii) In the case of a transaction in a

debt security, other than a government

security, that the security is unrated by

a nationally recognized statistical rating

organization, if that is the case.

(e) Notification by agreement;

alternative forms and times of

notification. A State member bank may

elect to use the following alternative

procedures if a transaction is effected

for:

(1) Accounts (except periodic plans)

where the bank does not exercise

investment discretion and the bank and

the customer agree in writing to a

different arrangement as to the time and

content of the notification; provided,

however, that such agreement makes

clear the customer’s right to receive the

written notification pursuant to

paragraph (c) of this section at no

additional cost to the customer;

(2) Accounts (except collective

investment funds) where the bank

exercises investment discretion in other

than an agency capacity, in which

instance the bank shall, upon request of

the person having the power to

terminate the account or, if there is no

such person, upon the request of any

person holding a vested beneficial

interest in such account, give or send to

such person the written notification

within a reasonable time. The bank may

charge such person a reasonable fee for

providing this information;

(3) Accounts, where the bank

exercises investment discretion in an

agency capacity, in which instance:

(i) The bank shall give or send to each

customer not less frequently than once

every three months an itemized

statement which shall specify the funds

and securities in the custody or

possession of the bank at the end of

such period and all debits, credits and

transactions in the customer’s accounts

during such period; and

(ii) If requested by the customer, the

bank shall give or send to each customer

within a reasonable time the written

notification described in paragraph (c)

of this section. The bank may charge a

reasonable fee for providing the

information described in paragraph (c)

of this section;

(4) A collective investment fund, in

which instance the bank shall at least

annually furnish a copy of a financial

report of the fund, or provide notice that

a copy of such report is available and

will be furnished upon request, to each

person to whom a regular periodic

accounting would ordinarily be

rendered with respect to each

participating account. This report shall

be based upon an audit made by

independent public accountants or

internal auditors responsible only to the

board of directors of the bank;

(5) A periodic plan, in which instance

the bank:

(i) Shall (except for a cash

management sweep service) give or send

to the customer a written statement not

less than every three months if there are

no securities transactions in the

account, showing the customer’s funds

and securities in the custody or

possession of the bank; all service

charges and commissions paid by the

customer in connection with the

transaction; and all other debits and

credits of the customer’s account

involved in the transaction; or

(ii) Shall for a cash management

sweep service or similar periodic plan

as defined in § 208.34(b)(10)(ii) give or

send its customer a written statement in

the same form as prescribed in

paragraph (e)(3) above for each month in

which a purchase or sale of a security

takes place in a deposit account and not

less than once every three months if

there are no securities transactions in

the account subject to any other

applicable laws or regulations;

(6) Upon the written request of the

customer the bank shall furnish the

information described in paragraph (d)

of this section, except that any such

information relating to remuneration

paid in connection with the transaction

need not be provided to the customer

when paid by a source other than the

customer. The bank may charge a

reasonable fee for providing the

information described in paragraph (d)

of this section.

(f) Settlement of securities

transactions. All contracts for the

purchase or sale of a security shall

provide for completion of the

transaction within the number of

business days in the standard settlement

cycle for the security followed by

registered broker dealers in the United

States unless otherwise agreed to by the

parties at the time of the transaction.

(g) Securities trading policies and

procedures. Every State member bank

effecting securities transactions for

customers shall establish written

policies and procedures providing:

(1) Assignment of responsibility for

supervision of all officers or employees

who:

(i) Transmit orders to or place orders

with broker/dealers;

(ii) Execute transactions in securities

for customers; or

(iii) Process orders for notification

and/or settlement purposes, or perform

other back office functions with respect

to securities transactions effected for

customers; provided that procedures

established under this paragraph
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37651

(g)(1)(iii) should provide for supervision

and reporting lines that are separate

from supervision of personnel under

paragraphs (g)(1)(i) and (g)(1)(ii) of this

section;

(2) For the fair and equitable

allocation of securities and prices to

accounts when orders for the same

security are received at approximately

the same time and are placed for

execution either individually or in

combination;

(3) Where applicable and where

permissible under local law, for the

crossing of buy and sell orders on a fair

and equitable basis to the parties to the

transaction; and

(4) That bank officers and employees

who make investment recommendations

or decisions for the accounts of

customers, who participate in the

determination of such recommendations

or decisions, or who, in connection with

their duties, obtain information

concerning which securities are being

purchased or sold or recommended for

such action, must report to the bank,

within ten days after the end of the

calendar quarter, all transactions in

securities made by them or on their

behalf, either at the bank or elsewhere

in which they have a beneficial interest.

The report shall identify the securities

purchased or sold and indicate the dates

of the transactions and whether the

transactions were purchases or sales.

Excluded from this requirement are

transactions for the benefit of the officer

or employee over which the officer or

employee has no direct or indirect

influence or control, transactions in

mutual fund shares, and all transactions

involving in the aggregate $10,000 or

less during the calendar quarter. For

purposes of this paragraph (g)(4), the

term securities does not include

government securities.

§ 208.35 Qualification requirements for

transactions in certain securities.

[Reserved]

§ 208.36 Reporting requirements for State

member banks subject to the Securities

Exchange Act of 1934.

(a) Filing requirements. Except as

otherwise provided in this section, a

member bank whose securities are

subject to registration pursuant to

section 12(b) or section 12(g) of the

Securities Exchange Act of 1934 (the

1934 Act) (15 U.S.C. 78l (b) and (g))

shall comply with the rules, regulations,

and forms adopted by the Securities and

Exchange Commission (Commission)

pursuant to sections 12, 13, 14(a), 14(c),

14(d), 14(f) and 16 of the 1934 Act (15

U.S.C. 78l, 78m, 78n(a), (c), (d), (f) and

78p). The term ‘‘Commission’’ as used

in those rules and regulations shall with

respect to securities issued by member

banks be deemed to refer to the Board

unless the context otherwise requires.

(b) Elections permitted for member

banks with total assets of $150 million

or less. (1) Notwithstanding paragraph

(a) of this section or the rules and

regulations promulgated by the

Commission pursuant to the 1934 Act a

member bank that has total assets of

$150 million or less as of the end of its

most recent fiscal year, and no foreign

offices, may elect to substitute for the

financial statements required by the

Commission’s Form 10–Q, the balance

sheet and income statement from the

quarterly report of condition required to

be filed by the bank with the Board

under section 9 of the Federal Reserve

Act (12 U.S.C. 324) (Federal Financial

Institutions Examination Council Form

033 or 034).

(2) A member bank qualifying for and

electing to file financial statements from

its quarterly report of condition

pursuant to paragraph (b)(1) of this

section in its form 10–Q shall include

earnings per share or net loss per share

data prepared in accordance with GAAP

and disclose any material contingencies,

as required by Article 10 of the

Commission’s Regulation S–X (17 CFR

210.10–01), in the Management’s

Discussion and Analysis of Financial

Condition and Results of Operations

section of Form 10–Q.

(c) Required filings. (1) Place and

timing of filing. All papers required to

be filed with the Board, pursuant to the

1934 Act or regulations thereunder,

shall be submitted to the Division of

Banking Supervision and Regulation,

Board of Governors of the Federal

Reserve System, 20th Street and

Constitution Avenue, NW., Washington,

DC 20551. Material may be filed by

delivery to the Board, through the mails,

or otherwise. The date on which papers

are actually received by the Board shall

be the date of filing thereof if all of the

requirements with respect to the filing

have been complied with.

(2) Filing fees. No filing fees specified

by the Commission’s rules shall be paid

to the Board.

(3) Public inspection. Copies of the

registration statement, definitive proxy

solicitation materials, reports, and

annual reports to shareholders required

by this section (exclusive of exhibits)

shall be available for public inspection

at the Board’s offices in Washington,

DC, as well as at the Federal Reserve

Banks of New York, Chicago, and San

Francisco and at the Reserve Bank in the

district in which the reporting bank is

located.

(d) Confidentiality of filing. Any

person filing any statement, report, or

document under the 1934 Act may make

written objection to the public

disclosure of any information contained

therein in accordance with the

following procedure:

(1) The person shall omit from the

statement, report, or document, when it

is filed, the portion thereof that the

person desires to keep undisclosed

(hereinafter called the confidential

portion). The person shall indicate at

the appropriate place in the statement,

report, or document that the

confidential portion has been omitted

and filed separately with the Board.

(2) The person shall file the following

with the copies of the statement, report,

or document filed with the Board:

(i) As many copies of the confidential

portion, each clearly marked

‘‘CONFIDENTIAL TREATMENT,’’ as

there are copies of the statement, report,

or document filed with the Board. Each

copy of the confidential portion shall

contain the complete text of the item

and, notwithstanding that the

confidential portion does not constitute

the whole of the answer, the entire

answer thereto; except that in case the

confidential portion is part of a financial

statement or schedule, only the

particular financial statement or

schedule need be included. All copies

of the confidential portion shall be in

the same form as the remainder of the

statement, report, or document; and

(ii) An application making objection

to the disclosure of the confidential

portion. The application shall be on a

sheet or sheets separate from the

confidential portion, and shall:

(A) Identify the portion of the

statement, report, or document that has

been omitted;

(B) Include a statement of the grounds

of objection; and

(C) Include the name of each

exchange, if any, with which the

statement, report, or document is filed.

(3) The copies of the confidential

portion and the application filed in

accordance with this paragraph shall be

enclosed in a separate envelope marked

‘‘CONFIDENTIAL TREATMENT,’’ and

addressed to Secretary, Board of

Governors of the Federal Reserve

System, Washington, DC 20551.

(4) Pending determination by the

Board on the objection filed in

accordance with this paragraph, the

confidential portion shall not be

disclosed by the Board.

(5) If the Board determines to sustain

the objection, a notation to that effect

shall be made at the appropriate place

in the statement, report, or document.

(6) If the Board determines not to

sustain the objection because disclosure

of the confidential portion is in the
37652 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

public interest, a finding and

determination to that effect shall be

entered and notice of the finding and

determination sent by registered or

certified mail to the person.

(7) If the Board determines not to

sustain the objection, pursuant to

paragraph (d)(6) of this section, the

confidential portion shall be made

available to the public:

(i) 15 days after notice of the Board’s

determination not to sustain the

objection has been given, as required by

paragraph (d)(6) of this section,

provided that the person filing the

objection has not previously filed with

the Board a written statement that he

intends, in good faith, to seek judicial

review of the finding and determination;

or

(ii) 60 days after notice of the Board’s

determination not to sustain the

objection has been given as required by

paragraph (d)(6) of this section and the

person filing the objection has filed with

the Board a written statement of intent

to seek judicial review of the finding

and determination, but has failed to file

a petition for judicial review of the

Board’s determination; or

(iii) Upon final judicial

determination, if adverse to the party

filing the objection.

(8) If the confidential portion is made

available to the public, a copy thereof

shall be attached to each copy of the

statement, report, or document filed

with the Board.

§ 208.37 Government securities sales

practices.

(a) Scope. This subpart is applicable

to state member banks that have filed

notice as, or are required to file notice

as, government securities brokers or

dealers pursuant to section 15C of the

Securities Exchange Act (15 U.S.C. 78o5) and Department of the Treasury rules

under section 15C (17 CFR 400.1(d) and

part 401).

(b) Definitions. For purposes of this

section:

(1) Bank that is a government

securities broker or dealer means a state

member bank that has filed notice, or is

required to file notice, as a government

securities broker or dealer pursuant to

section 15C of the Securities Exchange

Act (15 U.S.C. 78o-5) and Department of

the Treasury rules under section 15C (17

CFR 400.1(d) and Part 401).

(2) Customer does not include a

broker or dealer or a government

securities broker or dealer.

(3) Government security has the same

meaning as this term has in section

3(a)(42) of the Securities Exchange Act

of 1934 (15 U.S.C. 78c(a)(42)).

(4) Non-institutional customer means

any customer other than:

(i) A bank, savings association,

insurance company, or registered

investment company;

(ii) An investment adviser registered

under section 203 of the Investment

Advisers Act of 1940 (15 U.S.C. 80b-3);

or

(iii) Any entity (whether a natural

person, corporation, partnership, trust,

or otherwise) with total assets of at least

$50 million.

(c) Business conduct. A bank that is

a government securities broker or dealer

shall observe high standards of

commercial honor and just and

equitable principles of trade in the

conduct of its business as a government

securities broker or dealer.

(d) Recommendations to customers.

In recommending to a customer the

purchase, sale or exchange of a

government security, a bank that is a

government securities broker or dealer

shall have reasonable grounds for

believing that the recommendation is

suitable for the customer upon the basis

of the facts, if any, disclosed by the

customer as to the customer’s other

security holdings and as to the

customer’s financial situation and

needs.

(e) Customer information. Prior to the

execution of a transaction recommended

to a non-institutional customer, a bank

that is a government securities broker or

dealer shall make reasonable efforts to

obtain information concerning:

(1) The customer’s financial status;

(2) The customer’s tax status;

(3) The customer’s investment

objectives; and

(4) Such other information used or

considered to be reasonable by the bank

in making recommendations to the

customer.

Subpart D—Prompt Corrective Action

§ 208.40 Authority, purpose, scope, other

supervisory authority, and disclosure of

capital categories.

(a) Authority. Subpart D of Regulation

H (12 CFR part 208, Subpart D) is issued

by the Board of Governors of the Federal

Reserve System (Board) under section

38 (section 38) of the FDI Act as added

by section 131 of the Federal Deposit

Insurance Corporation Improvement Act

of 1991 (Pub. L. 102–242, 105 Stat. 2236

(1991)) (12 U.S.C. 1831o).

(b) Purpose and scope. This subpart D

defines the capital measures and capital

levels that are used for determining the

supervisory actions authorized under

section 38 of the FDI Act. (Section 38 of

the FDI Act establishes a framework of

supervisory actions for insured

depository institutions that are not

adequately capitalized.) This subpart

also establishes procedures for

submission and review of capital

restoration plans and for issuance and

review of directives and orders pursuant

to section 38. Certain of the provisions

of this subpart apply to officers,

directors, and employees of state

member banks. Other provisions apply

to any company that controls a member

bank and to the affiliates of the member

bank.

(c) Other supervisory authority.

Neither section 38 nor this subpart in

any way limits the authority of the

Board under any other provision of law

to take supervisory actions to address

unsafe or unsound practices or

conditions, deficient capital levels,

violations of law, or other practices.

Action under section 38 of the FDI Act

and this subpart may be taken

independently of, in conjunction with,

or in addition to any other enforcement

action available to the Board, including

issuance of cease and desist orders,

capital directives, approval or denial of

applications or notices, assessment of

civil money penalties, or any other

actions authorized by law.

(d) Disclosure of capital categories.

The assignment of a bank under this

subpart within a particular capital

category is for purposes of

implementing and applying the

provisions of section 38. Unless

permitted by the Board or otherwise

required by law, no bank may state in

any advertisement or promotional

material its capital category under this

subpart or that the Board or any other

Federal banking agency has assigned the

bank to a particular capital category.

§ 208.41 Definitions for purposes of this

subpart.

For purposes of this subpart, except as

modified in this section or unless the

context otherwise requires, the terms

used have the same meanings as set

forth in section 38 and section 3 of the

FDI Act.

(a) Control—(1) Control has the same

meaning assigned to it in section 2 of

the Bank Holding Company Act (12

U.S.C. 1841), and the term controlled

shall be construed consistently with the

term control.

(2) Exclusion for fiduciary ownership.

No insured depository institution or

company controls another insured

depository institution or company by

virtue of its ownership or control of

shares in a fiduciary capacity. Shares

shall not be deemed to have been

acquired in a fiduciary capacity if the

acquiring insured depository institution

or company has sole discretionary
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37653

authority to exercise voting rights with

respect to the shares.

(3) Exclusion for debts previously

contracted. No insured depository

institution or company controls another

insured depository institution or

company by virtue of its ownership or

control of shares acquired in securing or

collecting a debt previously contracted

in good faith, until two years after the

date of acquisition. The two-year period

may be extended at the discretion of the

appropriate Federal banking agency for

up to three one-year periods.

(b) Controlling person means any

person having control of an insured

depository institution and any company

controlled by that person.

(c) Leverage ratio means the ratio of

Tier 1 capital to average total

consolidated assets, as calculated in

accordance with the Board’s Capital

Adequacy Guidelines for State Member

Banks: Tier 1 Leverage Measure

(Appendix B to this part).

(d) Management fee means any

payment of money or provision of any

other thing of value to a company or

individual for the provision of

management services or advice to the

bank, or related overhead expenses,

including payments related to

supervisory, executive, managerial, or

policy making functions, other than

compensation to an individual in the

individual’s capacity as an officer or

employee of the bank.

(e) Risk-weighted assets means total

weighted risk assets, as calculated in

accordance with the Board’s Capital

Adequacy Guidelines for State Member

Banks: Risk-Based Measure (Appendix

A to this part).

(f) Tangible equity means the amount

of core capital elements in the Board’s

Capital Adequacy Guidelines for State

Member Banks: Risk-Based Measure

(Appendix A to this part), plus the

amount of outstanding cumulative

perpetual preferred stock (including

related surplus), minus all intangible

assets except mortgage servicing rights

to the extent that the Board determines

that mortgage servicing rights may be

included in calculating the bank’s Tier

1 capital.

(g) Tier 1 capital means the amount of

Tier 1 capital as defined in the Board’s

Capital Adequacy Guidelines for State

Member Banks: Risk-Based Measure

(Appendix A to this part).

(h) Tier 1 risk-based capital ratio

means the ratio of Tier 1 capital to

weighted risk assets, as calculated in

accordance with the Board’s Capital

Adequacy Guidelines for State Member

Banks: Risk-Based Measure (Appendix

A to this part).

(i) Total assets means quarterly

average total assets as reported in a

bank’s Report of Condition and Income

(Call Report), minus intangible assets as

provided in the definition of tangible

equity. At its discretion the Federal

Reserve may calculate total assets using

a bank’s period-end assets rather than

quarterly average assets.

(j) Total risk-based capital ratio

means the ratio of qualifying total

capital to weighted risk assets, as

calculated in accordance with the

Board’s Capital Adequacy Guidelines

for State Member Banks: Risk-Based

Measure (Appendix A to this part).

§ 208.42 Notice of capital category.

(a) Effective date of determination of

capital category. A member bank shall

be deemed to be within a given capital

category for purposes of section 38 of

the FDI Act and this subpart as of the

date the bank is notified of, or is

deemed to have notice of, its capital

category, pursuant to paragraph (b) of

this section.

(b) Notice of capital category. A

member bank shall be deemed to have

been notified of its capital levels and its

capital category as of the most recent

date:

(1) A Report of Condition and Income

(Call Report) is required to be filed with

the Board;

(2) A final report of examination is

delivered to the bank; or

(3) Written notice is provided by the

Board to the bank of its capital category

for purposes of section 38 of the FDI Act

and this subpart or that the bank’s

capital category has changed as

provided in paragraph (c) of this section

or § 208.43(c).

(c) Adjustments to reported capital

levels and capital category—(1) Notice

of adjustment by bank. A member bank

shall provide the Board with written

notice that an adjustment to the bank’s

capital category may have occurred no

later than 15 calendar days following

the date that any material event

occurred that would cause the bank to

be placed in a lower capital category

from the category assigned to the bank

for purposes of section 38 and this

subpart on the basis of the bank’s most

recent Call Report or report of

examination.

(2) Determination by Board to change

capital category. After receiving notice

pursuant to paragraph (c)(1) of this

section, the Board shall determine

whether to change the capital category

of the bank and shall notify the bank of

the Board’s determination.

§ 208.43 Capital measures and capital

category definitions.

(a) Capital measures. For purposes of

section 38 and this subpart, the relevant

capital measures are:

(1) The total risk-based capital ratio;

(2) The Tier 1 risk-based capital ratio;

and

(3) The leverage ratio.

(b) Capital categories. For purposes of

section 38 and this subpart, a member

bank is deemed to be:

(1) ‘‘Well capitalized’’ if the bank:

(i) Has a total risk-based capital ratio

of 10.0 percent or greater; and

(ii) Has a Tier 1 risk-based capital

ratio of 6.0 percent or greater; and

(iii) Has a leverage ratio of 5.0 percent

or greater; and

(iv) Is not subject to any written

agreement, order, capital directive, or

prompt corrective action directive

issued by the Board pursuant to section

8 of the FDI Act, the International

Lending Supervision Act of 1983 (12

U.S.C. 3907), or section 38 of the FDI

Act, or any regulation thereunder, to

meet and maintain a specific capital

level for any capital measure.

(2) ‘‘Adequately capitalized’’ if the

bank:

(i) Has a total risk-based capital ratio

of 8.0 percent or greater; and

(ii) Has a Tier 1 risk-based capital

ratio of 4.0 percent or greater; and

(iii) Has:

(A) A leverage ratio of 4.0 percent or

greater; or

(B) A leverage ratio of 3.0 percent or

greater if the bank is rated composite 1

under the CAMELS rating system in the

most recent examination of the bank

and is not experiencing or anticipating

significant growth; and

(iv) Does not meet the definition of a

‘‘well capitalized’’ bank.

(3) ‘‘Undercapitalized’’ if the bank

has:

(i) A total risk-based capital ratio that

is less than 8.0 percent; or

(ii) A Tier 1 risk-based capital ratio

that is less than 4.0 percent; or

(iii) Except as provided in paragraph

(b)(2)(iii)(B) of this section, has a

leverage ratio that is less than 4.0

percent; or

(iv) A leverage ratio that is less than

3.0 percent, if the bank is rated

composite 1 under the CAMELS rating

system in the most recent examination

of the bank and is not experiencing or

anticipating significant growth.

(4) ‘‘Significantly undercapitalized’’ if

the bank has:

(i) A total risk-based capital ratio that

is less than 6.0 percent; or

(ii) A Tier 1 risk-based capital ratio

that is less than 3.0 percent; or

(iii) A leverage ratio that is less than

3.0 percent.
37654 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

(5) ‘‘Critically undercapitalized’’ if the

bank has a ratio of tangible equity to

total assets that is equal to or less than

2.0 percent.

(c) Reclassification based on

supervisory criteria other than capital.

The Board may reclassify a well

capitalized member bank as adequately

capitalized and may require an

adequately-capitalized or an

undercapitalized member bank to

comply with certain mandatory or

discretionary supervisory actions as if

the bank were in the next lower capital

category (except that the Board may not

reclassify a significantly

undercapitalized bank as critically

undercapitalized) (each of these actions

are hereinafter referred to generally as

‘‘reclassifications’’) in the following

circumstances:

(1) Unsafe or unsound condition. The

Board has determined, after notice and

opportunity for hearing pursuant to 12

CFR 263.203, that the bank is in unsafe

or unsound condition; or

(2) Unsafe or unsound practice. The

Board has determined, after notice and

opportunity for hearing pursuant to 12

CFR 263.203, that, in the most recent

examination of the bank, the bank

received and has not corrected, a lessthan-satisfactory rating for any of the

categories of asset quality, management,

earnings, liquidity, or sensitivity to

market risk.

§ 208.44 Capital restoration plans.

(a) Schedule for filing plan. (1) In

general. A member bank shall file a

written capital restoration plan with the

appropriate Reserve Bank within 45

days of the date that the bank receives

notice or is deemed to have notice that

the bank is undercapitalized,

significantly undercapitalized, or

critically undercapitalized, unless the

Board notifies the bank in writing that

the plan is to be filed within a different

period. An adequately capitalized bank

that has been required, pursuant to

§ 208.43(c), to comply with supervisory

actions as if the bank were

undercapitalized is not required to

submit a capital restoration plan solely

by virtue of the reclassification.

(2) Additional capital restoration

plans. Notwithstanding paragraph (a)(1)

of this section, a bank that has already

submitted and is operating under a

capital restoration plan approved under

section 38 and this subpart is not

required to submit an additional capital

restoration plan based on a revised

calculation of its capital measures or a

reclassification of the institution under

§ 208.43(c), unless the Board notifies the

bank that it must submit a new or

revised capital plan. A bank that is

notified that it must submit a new or

revised capital restoration plan shall file

the plan in writing with the appropriate

Reserve Bank within 45 days of

receiving such notice, unless the Board

notifies the bank in writing that the plan

is to be filed within a different period.

(b) Contents of plan. All financial data

submitted in connection with a capital

restoration plan shall be prepared in

accordance with the instructions

provided on the Call Report, unless the

Board instructs otherwise. The capital

restoration plan shall include all of the

information required to be filed under

section 38(e)(2) of the FDI Act. A bank

that is required to submit a capital

restoration plan as the result of a

reclassification of the bank pursuant to

§ 208.43(c) shall include a description of

the steps the bank will take to correct

the unsafe or unsound condition or

practice. No plan shall be accepted

unless it includes any performance

guarantee described in section

38(e)(2)(C) of that Act by each company

that controls the bank.

(c) Review of capital restoration plans.

Within 60 days after receiving a capital

restoration plan under this subpart, the

Board shall provide written notice to the

bank of whether the plan has been

approved. The Board may extend the

time within which notice regarding

approval of a plan shall be provided.

(d) Disapproval of capital plan. If the

Board does not approve a capital

restoration plan, the bank shall submit

a revised capital restoration plan within

the time specified by the Board. Upon

receiving notice that its capital

restoration plan has not been approved,

any undercapitalized member bank (as

defined in § 208.43(b)(3)) shall be

subject to all of the provisions of section

38 and this subpart applicable to

significantly undercapitalized

institutions. These provisions shall be

applicable until such time as the Board

approves a new or revised capital

restoration plan submitted by the bank.

(e) Failure to submit capital

restoration plan. A member bank that is

undercapitalized (as defined in

§ 208.43(b)(3)) and that fails to submit a

written capital restoration plan within

the period provided in this section

shall, upon the expiration of that period,

be subject to all of the provisions of

section 38 and this subpart applicable to

significantly undercapitalized

institutions.

(f) Failure to implement capital

restoration plan. Any undercapitalized

member bank that fails in any material

respect to implement a capital

restoration plan shall be subject to all of

the provisions of section 38 and this

subpart applicable to significantly

undercapitalized institutions.

(g) Amendment of capital plan. A

bank that has filed an approved capital

restoration plan may, after prior written

notice to and approval by the Board,

amend the plan to reflect a change in

circumstance. Until such time as a

proposed amendment has been

approved, the bank shall implement the

capital restoration plan as approved

prior to the proposed amendment.

(h) Notice to FDIC. Within 45 days of

the effective date of Board approval of

a capital restoration plan, or any

amendment to a capital restoration plan,

the Board shall provide a copy of the

plan or amendment to the Federal

Deposit Insurance Corporation.

(i) Performance guarantee by

companies that control a bank. (1)

Limitation on Liability. (i) Amount

limitation. The aggregate liability under

the guarantee provided under section 38

and this subpart for all companies that

control a specific member bank that is

required to submit a capital restoration

plan under this subpart shall be limited

to the lesser of:

(A) An amount equal to 5.0 percent of

the bank’s total assets at the time the

bank was notified or deemed to have

notice that the bank was

undercapitalized; or

(B) The amount necessary to restore

the relevant capital measures of the

bank to the levels required for the bank

to be classified as adequately

capitalized, as those capital measures

and levels are defined at the time that

the bank initially fails to comply with

a capital restoration plan under this

subpart.

(ii) Limit on duration. The guarantee

and limit of liability under section 38

and this subpart shall expire after the

Board notifies the bank that it has

remained adequately capitalized for

each of four consecutive calendar

quarters. The expiration or fulfillment

by a company of a guarantee of a capital

restoration plan shall not limit the

liability of the company under any

guarantee required or provided in

connection with any capital restoration

plan filed by the same bank after

expiration of the first guarantee.

(iii) Collection on guarantee. Each

company that controls a bank shall be

jointly and severally liable for the

guarantee for such bank as required

under section 38 and this subpart, and

the Board may require and collect

payment of the full amount of that

guarantee from any or all of the

companies issuing the guarantee.

(2) Failure to provide guarantee. In

the event that a bank that is controlled

by a company submits a capital
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37655

restoration plan that does not contain

the guarantee required under section

38(e)(2) of the FDI Act, the bank shall,

upon submission of the plan, be subject

to the provisions of section 38 and this

subpart that are applicable to banks that

have not submitted an acceptable

capital restoration plan.

(3) Failure to perform guarantee.

Failure by any company that controls a

bank to perform fully its guarantee of

any capital plan shall constitute a

material failure to implement the plan

for purposes of section 38(f) of the FDI

Act. Upon such failure, the bank shall

be subject to the provisions of section 38

and this subpart that are applicable to

banks that have failed in a material

respect to implement a capital

restoration plan.

§ 208.45 Mandatory and discretionary

supervisory actions under section 38.

(a) Mandatory supervisory actions. (1)

Provisions applicable to all banks. All

member banks are subject to the

restrictions contained in section 38(d) of

the FDI Act on payment of capital

distributions and management fees.

(2) Provisions applicable to

undercapitalized, significantly

undercapitalized, and critically

undercapitalized banks. Immediately

upon receiving notice or being deemed

to have notice, as provided in § 208.42

or § 208.44, that the bank is

undercapitalized, significantly

undercapitalized, or critically

undercapitalized, the bank shall become

subject to the provisions of section 38 of

the FDI Act:

(i) Restricting payment of capital

distributions and management fees

(section 38(d));

(ii) Requiring that the Board monitor

the condition of the bank (section

38(e)(1));

(iii) Requiring submission of a capital

restoration plan within the schedule

established in this subpart (section

38(e)(2));

(iv) Restricting the growth of the

bank’s assets (section 38(e)(3)); and

(v) Requiring prior approval of certain

expansion proposals (section 3(e)(4)).

(3) Additional provisions applicable

to significantly undercapitalized, and

critically undercapitalized banks. In

addition to the provisions of section 38

of the FDI Act described in paragraph

(a)(2) of this section, immediately upon

receiving notice or being deemed to

have notice, as provided in § 208.42 or

§ 208.44, that the bank is significantly

undercapitalized, or critically

undercapitalized, or that the bank is

subject to the provisions applicable to

institutions that are significantly

undercapitalized because the bank

failed to submit or implement in any

material respect an acceptable capital

restoration plan, the bank shall become

subject to the provisions of section 38 of

the FDI Act that restrict compensation

paid to senior executive officers of the

institution (section 38(f)(4)).

(4) Additional provisions applicable

to critically undercapitalized banks. In

addition to the provisions of section 38

of the FDI Act described in paragraphs

(a)(2) and (a)(3) of this section,

immediately upon receiving notice or

being deemed to have notice, as

provided in § 208.32, that the bank is

critically undercapitalized, the bank

shall become subject to the provisions of

section 38 of the FDI Act:

(i) Restricting the activities of the

bank (section 38(h)(1)); and

(ii) Restricting payments on

subordinated debt of the bank (section

38(h)(2)).

(b) Discretionary supervisory actions.

In taking any action under section 38

that is within the Board’s discretion to

take in connection with: A member

bank that is deemed to be

undercapitalized, significantly

undercapitalized, or critically

undercapitalized, or has been

reclassified as undercapitalized, or

significantly undercapitalized; an officer

or director of such bank; or a company

that controls such bank, the Board shall

follow the procedures for issuing

directives under 12 CFR 263.202 and

263.204, unless otherwise provided in

section 38 or this subpart.

Subpart E—Real Estate Lending and

Appraisal Standards

§ 208.50 Authority, purpose, and scope.

(a) Authority. Subpart E of Regulation

H (12 CFR part 208, subpart E) is issued

by the Board of Governors of the Federal

Reserve System under section 304 of the

Federal Deposit Insurance Corporation

Improvement Act of 1991, 12 U.S.C.

1828(o) and Title 11 of the Financial

Institutions Reform, Recovery, and

Enforcement Act (12 U.S.C. 3331–3351).

(b) Purpose and scope. This subpart E

prescribes standards for real estate

lending to be used by member banks in

adopting internal real estate lending

policies. The standards applicable to

appraisals rendered in connection with

federally related transactions entered

into by member banks are set forth in 12

CFR part 225, subpart G (Regulation Y).

§ 208.51 Real estate lending standards.

(a) Adoption of written policies. Each

state bank that is a member of the

Federal Reserve System shall adopt and

maintain written policies that establish

appropriate limits and standards for

extensions of credit that are secured by

liens on or interests in real estate, or

that are made for the purpose of

financing permanent improvements to

real estate.

(b) Requirements of lending policies.

(1) Real estate lending policies adopted

pursuant to this section shall be:

(i) Consistent with safe and sound

banking practices;

(ii) Appropriate to the size of the

institution and the nature and scope of

its operations; and

(iii) Reviewed and approved by the

bank’s board of directors at least

annually.

(2) The lending policies shall

establish:

(i) Loan portfolio diversification

standards;

(ii) Prudent underwriting standards,

including loan-to-value limits, that are

clear and measurable;

(iii) Loan administration procedures

for the bank’s real estate portfolio; and

(iv) Documentation, approval, and

reporting requirements to monitor

compliance with the bank’s real estate

lending policies.

(c) Monitoring conditions. Each

member bank shall monitor conditions

in the real estate market in its lending

area to ensure that its real estate lending

policies continue to be appropriate for

current market conditions.

(d) Interagency guidelines. The real

estate lending policies adopted pursuant

to this section should reflect

consideration of the Interagency

Guidelines for Real Estate Lending

Policies (contained in appendix C of

this part) established by the Federal

bank and thrift supervisory agencies.

Subpart F—Miscellaneous

Requirements

§ 208.60 Authority, purpose, and scope.

(a) Authority. Subpart F of Regulation

H (12 CFR part 208, subpart F) is issued

by the Board of Governors of the Federal

Reserve System under sections 9, 11, 21,

25 and 25A of the Federal Reserve Act

(12 U.S.C. 321–338a, 248(a), 248(c),

481–486, 601 and 611), section 7 of the

International Banking Act (12 U.S.C.

3105), section 3 of the Bank Protection

Act of 1968 (12 U.S.C. 1882), sections

1814, 1816, 1818, 1831o, 1831p–1 and

1831r–1 of the FDI Act (12 U.S.C. 1814,

1816, 1818, 1831o, 1831p–1 and 1831r–

1), and the Bank Secrecy Act (31 U.S.C.

5318).

(b) Purpose and scope. This subpart F

describes a member bank’s obligation to

implement security procedures to

discourage certain crimes, to file

suspicious activity reports, and to

comply with the Bank Secrecy Act’s
37656 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

requirements for reporting and

recordkeeping of currency and foreign

transactions. It also describes the

examination schedule for certain small

insured member banks.

§ 208.61 Bank security procedures.

(a) Authority, purpose, and scope.

Pursuant to section 3 of the Bank

Protection Act of 1968 (12 U.S.C. 1882),

member banks are required to adopt

appropriate security procedures to

discourage robberies, burglaries, and

larcenies, and to assist in the

identification and prosecution of

persons who commit such acts. It is the

responsibility of the member bank’s

board of directors to comply with the

provisions of this section and ensure

that a written security program for the

bank’s main office and branches is

developed and implemented.

(b) Designation of security officer.

Upon becoming a member of the Federal

Reserve System, a member bank’s board

of directors shall designate a security

officer who shall have the authority,

subject to the approval of the board of

directors, to develop, within a

reasonable time, but no later than 180

days, and to administer a written

security program for each banking

office.

(c) Security program. (1) The security

program shall:

(i) Establish procedures for opening

and closing for business and for the

safekeeping of all currency, negotiable

securities, and similar valuables at all

times;

(ii) Establish procedures that will

assist in identifying persons committing

crimes against the institution and that

will preserve evidence that may aid in

their identification and prosecution.

Such procedures may include, but are

not limited to: maintaining a camera

that records activity in the banking

office; using identification devices, such

as prerecorded serial-numbered bills, or

chemical and electronic devices; and

retaining a record of any robbery,

burglary, or larceny committed against

the bank;

(iii) Provide for initial and periodic

training of officers and employees in

their responsibilities under the security

program and in proper employee

conduct during and after a burglary,

robbery, or larceny; and

(iv) Provide for selecting, testing,

operating, and maintaining appropriate

security devices, as specified in

paragraph (c)(2) of this section.

(2) Security devices. Each member

bank shall have, at a minimum, the

following security devices:

(i) A means of protecting cash and

other liquid assets, such as a vault, safe,

or other secure space;

(ii) A lighting system for illuminating,

during the hours of darkness, the area

around the vault, if the vault is visible

from outside the banking office;

(iii) Tamper-resistant locks on exterior

doors and exterior windows that may be

opened;

(iv) An alarm system or other

appropriate device for promptly

notifying the nearest responsible law

enforcement officers of an attempted or

perpetrated robbery or burglary; and

(v) Such other devices as the security

officer determines to be appropriate,

taking into consideration: the incidence

of crimes against financial institutions

in the area; the amount of currency and

other valuables exposed to robbery,

burglary, or larceny; the distance of the

banking office from the nearest

responsible law enforcement officers;

the cost of the security devices; other

security measures in effect at the

banking office; and the physical

characteristics of the structure of the

banking office and its surroundings.

(d) Annual reports. The security

officer for each member bank shall

report at least annually to the bank’s

board of directors on the

implementation, administration, and

effectiveness of the security program.

(e) Reserve Banks. Each Reserve Bank

shall develop and maintain a written

security program for its main office and

branches subject to review and approval

of the Board.

§ 208.62 Suspicious activity reports.

(a) Purpose. This section ensures that

a member bank files a Suspicious

Activity Report when it detects a known

or suspected violation of Federal law, or

a suspicious transaction related to a

money laundering activity or a violation

of the Bank Secrecy Act. This section

applies to all member banks.

(b) Definitions. For the purposes of

this section:

(1) FinCEN means the Financial

Crimes Enforcement Network of the

Department of the Treasury.

(2) Institution-affiliated party means

any institution-affiliated party as that

term is defined in 12 U.S.C. 1786(r), or

1813(u) and 1818(b) (3), (4) or (5).

(3) SAR means a Suspicious Activity

Report on the form prescribed by the

Board.

(c) SARs required. A member bank

shall file a SAR with the appropriate

Federal law enforcement agencies and

the Department of the Treasury in

accordance with the form’s instructions

by sending a completed SAR to FinCEN

in the following circumstances:

(1) Insider abuse involving any

amount. Whenever the member bank

detects any known or suspected Federal

criminal violation, or pattern of criminal

violations, committed or attempted

against the bank or involving a

transaction or transactions conducted

through the bank, where the bank

believes that it was either an actual or

potential victim of a criminal violation,

or series of criminal violations, or that

the bank was used to facilitate a

criminal transaction, and the bank has

a substantial basis for identifying one of

its directors, officers, employees, agents

or other institution-affiliated parties as

having committed or aided in the

commission of a criminal act regardless

of the amount involved in the violation.

(2) Violations aggregating $5,000 or

more where a suspect can be identified.

Whenever the member bank detects any

known or suspected Federal criminal

violation, or pattern of criminal

violations, committed or attempted

against the bank or involving a

transaction or transactions conducted

through the bank and involving or

aggregating $5,000 or more in funds or

other assets, where the bank believes

that it was either an actual or potential

victim of a criminal violation, or series

of criminal violations, or that the bank

was used to facilitate a criminal

transaction, and the bank has a

substantial basis for identifying a

possible suspect or group of suspects. If

it is determined prior to filing this

report that the identified suspect or

group of suspects has used an ‘‘alias,’’

then information regarding the true

identity of the suspect or group of

suspects, as well as alias identifiers,

such as drivers’ licenses or social

security numbers, addresses and

telephone numbers, must be reported.

(3) Violations aggregating $25,000 or

more regardless of a potential suspect.

Whenever the member bank detects any

known or suspected Federal criminal

violation, or pattern of criminal

violations, committed or attempted

against the bank or involving a

transaction or transactions conducted

through the bank and involving or

aggregating $25,000 or more in funds or

other assets, where the bank believes

that it was either an actual or potential

victim of a criminal violation, or series

of criminal violations, or that the bank

was used to facilitate a criminal

transaction, even though there is no

substantial basis for identifying a

possible suspect or group of suspects.

(4) Transactions aggregating $5,000 or

more that involve potential money

laundering or violations of the Bank

Secrecy Act. Any transaction (which for

purposes of this paragraph (c)(4) means
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37657

a deposit, withdrawal, transfer between

accounts, exchange of currency, loan,

extension of credit, purchase or sale of

any stock, bond, certificate of deposit, or

other monetary instrument or

investment security, or any other

payment, transfer, or delivery by,

through, or to a financial institution, by

whatever means effected) conducted or

attempted by, at or through the member

bank and involving or aggregating

$5,000 or more in funds or other assets,

if the bank knows, suspects, or has

reason to suspect that:

(i) The transaction involves funds

derived from illegal activities or is

intended or conducted in order to hide

or disguise funds or assets derived from

illegal activities (including, without

limitation, the ownership, nature,

source, location, or control of such

funds or assets) as part of a plan to

violate or evade any law or regulation or

to avoid any transaction reporting

requirement under federal law;

(ii) The transaction is designed to

evade any regulations promulgated

under the Bank Secrecy Act; or

(iii) The transaction has no business

or apparent lawful purpose or is not the

sort in which the particular customer

would normally be expected to engage,

and the bank knows of no reasonable

explanation for the transaction after

examining the available facts, including

the background and possible purpose of

the transaction.

(d) Time for reporting. A member

bank is required to file a SAR no later

than 30 calendar days after the date of

initial detection of facts that may

constitute a basis for filing a SAR. If no

suspect was identified on the date of

detection of the incident requiring the

filing, a member bank may delay filing

a SAR for an additional 30 calendar

days to identify a suspect. In no case

shall reporting be delayed more than 60

calendar days after the date of initial

detection of a reportable transaction. In

situations involving violations requiring

immediate attention, such as when a

reportable violation is on-going, the

financial institution shall immediately

notify, by telephone, an appropriate law

enforcement authority and the Board in

addition to filing a timely SAR.

(e) Reports to state and local

authorities. Member banks are

encouraged to file a copy of the SAR

with state and local law enforcement

agencies where appropriate.

(f) Exceptions. (1) A member bank

need not file a SAR for a robbery or

burglary committed or attempted that is

reported to appropriate law enforcement

authorities.

(2) A member bank need not file a

SAR for lost, missing, counterfeit, or

stolen securities if it files a report

pursuant to the reporting requirements

of 17 CFR 240.17f–1.

(g) Retention of records. A member

bank shall maintain a copy of any SAR

filed and the original or business record

equivalent of any supporting

documentation for a period of five years

from the date of the filing of the SAR.

Supporting documentation shall be

identified and maintained by the bank

as such, and shall be deemed to have

been filed with the SAR. A member

bank must make all supporting

documentation available to appropriate

law enforcement agencies upon request.

(h) Notification to board of directors.

The management of a member bank

shall promptly notify its board of

directors, or a committee thereof, of any

report filed pursuant to this section.

(i) Compliance. Failure to file a SAR

in accordance with this section and the

instructions may subject the member

bank, its directors, officers, employees,

agents, or other institution affiliated

parties to supervisory action.

(j) Confidentiality of SARs. SARs are

confidential. Any member bank

subpoenaed or otherwise requested to

disclose a SAR or the information

contained in a SAR shall decline to

produce the SAR or to provide any

information that would disclose that a

SAR has been prepared or filed citing

this section, applicable law (e.g., 31

U.S.C. 5318(g)), or both, and notify the

Board.

(k) Safe harbor. The safe harbor

provisions of 31 U.S.C. 5318(g), which

exempts any member bank that makes a

disclosure of any possible violation of

law or regulation from liability under

any law or regulation of the United

States, or any constitution, law or

regulation of any state or political

subdivision, covers all reports of

suspected or known criminal violations

and suspicious activities to law

enforcement and financial institution

supervisory authorities, including

supporting documentation, regardless of

whether such reports are filed pursuant

to this section or are filed on a voluntary

basis.

§ 208.63 Procedures for monitoring Bank

Secrecy Act compliance.

(a) Purpose. This section is issued to

assure that all state member banks

establish and maintain procedures

reasonably designed to assure and

monitor their compliance with the

provisions of the Bank Secrecy Act (31

U.S.C. 5311, et seq.) and the

implementing regulations promulgated

thereunder by the Department of

Treasury at 31 CFR part 103, requiring

recordkeeping and reporting of currency

transactions.

(b) Establishment of compliance

program. On or before April 27, 1987,

each bank shall develop and provide for

the continued administration of a

program reasonably designed to assure

and monitor compliance with the

recordkeeping and reporting

requirements set forth in the Bank

Secrecy Act (31 U.S.C. 5311, et seq.) and

the implementing regulations

promulgated thereunder by the

Department of Treasury at 31 CFR part

103. The compliance program shall be

reduced to writing, approved by the

board of directors, and noted in the

minutes.

(c) Contents of compliance program.

The compliance program shall, at a

minimum:

(1) Provide for a system of internal

controls to assure ongoing compliance;

(2) Provide for independent testing for

compliance to be conducted by bank

personnel or by an outside party;

(3) Designate an individual or

individuals responsible for coordinating

and monitoring day-to-day compliance;

and

(4) Provide training for appropriate

personnel.

§ 208.64 Frequency of examination.

(a) General. The Federal Reserve

examines insured member banks

pursuant to authority conferred by 12

U.S.C. 325 and the requirements of 12

U.S.C. 1820(d). The Federal Reserve is

required to conduct a full-scope, on-site

examination of every insured member

bank at least once during each 12-month

period.

(b) 18-month rule for certain small

institutions. The Federal Reserve may

conduct a full-scope, on-site

examination of an insured member bank

at least once during each 18-month

period, rather than each 12-month

period as provided in paragraph (a) of

this section, if the following conditions

are satisfied:

(1) The bank has total assets of $250

million or less;

(2) The bank is well capitalized as

defined in subpart D of this part

(§ 208.43);

(3) At the most recent examination

conducted by either the Federal Reserve

or applicable State banking agency, the

Federal Reserve found the bank to be

well managed;

(4) At the most recent examination

conducted by either the Federal Reserve

or applicable State banking agency, the

Federal Reserve assigned the bank a

CAMELS rating of 1 or 2;

(5) The bank currently is not subject

to a formal enforcement proceeding or
37658 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

7The interpretation in this section does not

address the obligation related to suitability that

requires that a bank have’’* * * a ‘reasonable basis’

to believe that the recommendation could be

suitable for at least some customers.’’ In the Matter

of the Application of F.J. Kaufman and Company of

Virginia and Frederick J. Kaufman, Jr., 50 SEC 164

(1989). 8See footnote 7 in paragraph (d) of this section.

order by the FDIC, OCC, or Federal

Reserve System; and

(6) No person acquired control of the

bank during the preceding 12-month

period in which a full-scope, on-site

examination would have been required

but for this section.

(c) Authority to conduct more

frequent examinations. This section

does not limit the authority of the

Federal Reserve to examine any member

bank as frequently as the agency deems

necessary.

Subpart G—Interpretations

§ 208.100 Sale of bank’s money orders off

premises as establishment of branch office.

(a) The Board of Governors has been

asked to consider whether the

appointment by a member bank of an

agent to sell the bank’s money orders, at

a location other than the premises of the

bank, constitutes the establishment of a

branch office.

(b) Section 5155 of the Revised

Statutes (12 U.S.C. 36), which is also

applicable to member banks, defines the

term branch as including ‘‘any branch

bank, branch office, branch agency,

additional office, or any branch place of

business * * * at which deposits are

received, or checks paid, or money

lent.’’ The basic question is whether the

sale of a bank’s money orders by an

agent amounts to the receipt of deposits

at a branch place of business within the

meaning of this statute.

(c) Money orders are classified as

deposits for certain purposes. However,

they bear a strong resemblance to

traveler’s checks that are issued by

banks and sold off premises. In both

cases, the purchaser does not intend to

establish a deposit account in the bank,

although a liability on the bank’s part is

created. Even though they result in a

deposit liability, the Board is of the

opinion that the issuance of a bank’s

money orders by an authorized agent

does not involve the receipt of deposits

at a ‘‘branch place of business’’ and

accordingly does not require the Board’s

permission to establish a branch.

§ 208.101 Obligations concerning

institutional customers.

(a) As a result of broadened authority

provided by the Government Securities

Act Amendments of 1993 (15 U.S.C.

78o–3 and 78o–5), the Board is adopting

sales practice rules for the government

securities market, a market with a

particularly broad institutional

component. Accordingly, the Board

believes it is appropriate to provide

further guidance to banks on their

suitability obligations when making

recommendations to institutional

customers.

(b) The Board’s Suitability Rule,

§ 208.37(d), is fundamental to fair

dealing and is intended to promote

ethical sales practices and high

standards of professional conduct.

Banks’ responsibilities include having a

reasonable basis for recommending a

particular security or strategy, as well as

having reasonable grounds for believing

the recommendation is suitable for the

customer to whom it is made. Banks are

expected to meet the same high

standards of competence,

professionalism, and good faith

regardless of the financial circumstances

of the customer.

(c) In recommending to a customer

the purchase, sale, or exchange of any

government security, the bank shall

have reasonable grounds for believing

that the recommendation is suitable for

the customer upon the basis of the facts,

if any, disclosed by the customer as to

the customer’s other security holdings

and financial situation and needs.

(d) The interpretation in this section

concerns only the manner in which a

bank determines that a recommendation

is suitable for a particular institutional

customer. The manner in which a bank

fulfills this suitability obligation will

vary, depending on the nature of the

customer and the specific transaction.

Accordingly, the interpretation in this

section deals only with guidance

regarding how a bank may fulfill

customer-specific suitability obligations

under § 208.37(d).7

(e) While it is difficult to define in

advance the scope of a bank’s suitability

obligation with respect to a specific

institutional customer transaction

recommended by a bank, the Board has

identified certain factors that may be

relevant when considering compliance

with § 208.37(d). These factors are not

intended to be requirements or the only

factors to be considered but are offered

merely as guidance in determining the

scope of a bank’s suitability obligations.

(f) The two most important

considerations in determining the scope

of a bank’s suitability obligations in

making recommendations to an

institutional customer are the

customer’s capability to evaluate

investment risk independently and the

extent to which the customer is

exercising independent judgement in

evaluating a bank’s recommendation. A

bank must determine, based on the

information available to it, the

customer’s capability to evaluate

investment risk. In some cases, the bank

may conclude that the customer is not

capable of making independent

investment decisions in general. In

other cases, the institutional customer

may have general capability, but may

not be able to understand a particular

type of instrument or its risk. This is

more likely to arise with relatively new

types of instruments, or those with

significantly different risk or volatility

characteristics than other investments

generally made by the institution. If a

customer is either generally not capable

of evaluating investment risk or lacks

sufficient capability to evaluate the

particular product, the scope of a bank’s

customer-specific obligations under

§ 208.37(d) would not be diminished by

the fact that the bank was dealing with

an institutional customer. On the other

hand, the fact that a customer initially

needed help understanding a potential

investment need not necessarily imply

that the customer did not ultimately

develop an understanding and make an

independent investment decision.

(g) A bank may conclude that a

customer is exercising independent

judgement if the customer’s investment

decision will be based on its own

independent assessment of the

opportunities and risks presented by a

potential investment, market factors and

other investment considerations. Where

the bank has reasonable grounds for

concluding that the institutional

customer is making independent

investment decisions and is capable of

independently evaluating investment

risk, then a bank’s obligations under

§ 208.25(d) for a particular customer are

fulfilled.8 Where a customer has

delegated decision-making authority to

an agent, such as an investment advisor

or a bank trust department, the

interpretation in this section shall be

applied to the agent.

(h) A determination of capability to

evaluate investment risk independently

will depend on an examination of the

customer’s capability to make its own

investment decisions, including the

resources available to the customer to

make informed decisions. Relevant

considerations could include:

(1) The use of one or more

consultants, investment advisers, or

bank trust departments;

(2) The general level of experience of

the institutional customer in financial

markets and specific experience with

the type of instruments under

consideration;
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37659

(3) The customer’s ability to

understand the economic features of the

security involved;

(4) The customer’s ability to

independently evaluate how market

developments would affect the security;

and

(5) The complexity of the security or

securities involved.

(i) A determination that a customer is

making independent investment

decisions will depend on the nature of

the relationship that exists between the

bank and the customer. Relevant

considerations could include:

(1) Any written or oral understanding

that exists between the bank and the

customer regarding the nature of the

relationship between the bank and the

customer and the services to be

rendered by the bank;

(2) The presence or absence of a

pattern of acceptance of the bank’s

recommendations;

(3) The use by the customer of ideas,

suggestions, market views and

information obtained from other

government securities brokers or dealers

or market professionals, particularly

those relating to the same type of

securities; and

(4) The extent to which the bank has

received from the customer current

comprehensive portfolio information in

connection with discussing

recommended transactions or has not

been provided important information

regarding its portfolio or investment

objectives.

(j) Banks are reminded that these

factors are merely guidelines that will

be utilized to determine whether a bank

has fulfilled its suitability obligation

with respect to a specific institutional

customer transaction and that the

inclusion or absence of any of these

factors is not dispositive of the

determination of suitability. Such a

determination can only be made on a

case-by-case basis taking into

consideration all the facts and

circumstances of a particular bank/

customer relationship, assessed in the

context of a particular transaction.

(k) For purposes of the interpretation

in this section, an institutional customer

shall be any entity other than a natural

person. In determining the applicability

of the interpretation in this section to an

institutional customer, the Board will

consider the dollar value of the

securities that the institutional customer

has in its portfolio and/or under

management. While the interpretation

in this section is potentially applicable

to any institutional customer, the

guidance contained in this section is

more appropriately applied to an

institutional customer with at least $10

million invested in securities in the

aggregate in its portfolio and/or under

management.

PART 250—MISCELLANEOUS

INTERPRETATIONS

1. The authority citation for part 250

continues to read as follows:

Authority: 12 U.S.C. 78, 248(i) and 371c(e).

§§ 250.120 through 250.123, 250.140,

250.161, 250.162 [Removed]

2. Sections 250.120, 250.121, 250.122,

250.123, 250.140, 250.161, 250.162 are

removed.

§§ 250.300 through 250.302 [Removed]

3. The undesignated center heading

preceding § 250.300 and §§ 250.300

through 250.302 are removed.

By order of the Board of Governors of the

Federal Reserve System, July 6, 1998

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 98–18274 Filed 7–10–98; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

12 CFR Part 209

[Regulation I; Docket No. R–0966]

Issue and Cancellation of Federal

Reserve Bank Capital Stock

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board of Governors of the

Federal Reserve System is amending its

Regulation I regarding the issue and

cancellation of Federal Reserve Bank

Capital Stock in order to reduce

regulatory burden and simplify and

update requirements. The amendments

modernize Regulation I in accordance

with the Board’s policy of regular

review of its regulations and the Board’s

review of its regulations pursuant to

section 303 of the Riegle Community

Development and Regulatory

Improvement Act of 1994.

EFFECTIVE DATE: October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Rick

Heyke, Staff Attorney (202/452–3688),

Legal Division, Board of Governors; Bill

Pullen, Accountant (202/736–1947,

Division of Reserve Bank Operations

and Payment Systems, Board of

Governors; or Anthony Scafide,

Manager (215/574–6546), Wholesale

Payments Division, Federal Reserve

Bank of Philadelphia. For the hearing

impaired only, Telecommunications

Device for the Deaf (TDD), Diane Jenkins

Thompson (202/452–3544).

SUPPLEMENTARY INFORMATION:

Background

As part of its policy of regular review

of its regulations, and consistent with

section 303 of the Riegle Community

Development and Regulatory

Improvement Act of 1994 (Riegle Act),

the Board of Governors of the Federal

Reserve System (Board) is amending its

Regulation I regarding issue and

cancellation of Federal Reserve Bank

capital stock (12 CFR part 209). Section

303 of the Riegle Act requires each

federal banking agency to review and

streamline its regulations and written

policies to improve efficiency, reduce

unnecessary costs, and remove

inconsistencies and outmoded and

duplicative requirements. The

amendments are designed to reduce

regulatory burden and simplify and

update the Regulation.

The Board published a notice of

proposed rulemaking in the Federal

Register on March 31, 1997 (62 FR

15297) that solicited comments on the

proposed amendments described below.

In general, the amendments simplified,

modernized, and condensed the

Regulation, and reflected the

replacement of share certificates by a

book-entry system. The amendments

also codified Board and staff

interpretations. In addition, the

amendments deleted the many

references to specific forms. Many of

these references are incorrect because

the forms no longer exist or no longer

have the same identification numbers.

Finally, the proposal sought comment

on the method of computing accrued

dividends on Reserve Bank capital stock

and on deferring changes in Reserve

Bank capital stock positions to reflect

small changes in member bank capital

stock and surplus.

The Board received nine comments

on its proposal, five from Federal

Reserve Banks, three from banking

organizations, and one from a trade

association. The comments were

generally supportive of the proposal

overall, and especially of the shift to

book entry electronic recordkeeping.

Final Rule

The Board is adopting the revised

Regulation I substantially as proposed.

In addition, in response to comments,

the final Regulation makes clear that

Reserve Bank stock is issued to member

banks in organization as of their

opening for business and not before,

incorporates the Board’s final rule on

relocation of member banks and makes

appropriate adjustments to the section

on Cancellation of Reserve Bank Stock,

carries over adjustments in Reserve